Bad Credit Auto Loans – Another Point of View

I’m sure you’ve seen all those ads on the TV and on the Magazines that promise you car loans even if you have the worst credit history. Sure it sounds all great and good but don’t you think that there’s a little something beyond just the façade of providing car loans to everyone including those with very bad credit histories? In this section we’ll look at some pit falls that you might not necessarily understand until it hits you in the face. We’ll look at things to watch out and also help you understand the “system” better.

Let’s first classify lenders into some groups. You got your local banks which is pretty self explanatory. You got your direct finance businesses which work with car dealers and for the most part are the ones that help the dealers get their cars financed to put on the show-room and are also the ones who help with financing purchases for consumers under the dealer’s dealership name. You also have your direct dealer financing which is where the dealership actually offers the financing option to you in-house.

Each of these different types of car loans has its advantages however for the purposes of auto loans with bad credit the only ones that really apply are direct financing businesses and dealer financing. Almost all local banks or retail banks will shy away from car loans to applicants who have a bad credit score. They would rather not have that type of risk profile in their books to keep their shareholders happy.

If you have a severely compromised credit score you should expect a few things right off the bat. You should expect that the car loan is going to cost more. This is represented by higher interest rate which can range anywhere from 5% to 28%. You should also expect that you will have to put down more down-payment; somewhere between 20-50% of the asking price. Your amortization period will also be shorter, ranging from 2 - 4 years instead of the normal 5 – 7 years.

Now let’s go into the common abuses that happen with bad credit auto loans. The most prevalent cases are from dealers who inflate the prices of their cars and also hike interest rates up with the justification that they have to do it because of your bad credit history. They will take a car with a market value of $4,000 and mark it up to $8,000. To make you happy they will give you a wholesome discount to $6,000 and finance it at higher rates of 20-28% again citing that your bad credit score is the cause of this high interest rate. The problem here is obvious. The underlying asset (the car) isn’t realistically priced against the loan and the steep interest rates also bare limited correlation with your credit score. You will simply be paying too much for the car and will run a higher chance of default and hurting your credit score even more. Naturally the best protection against this is knowledge. Don’t just take your dealers word for the price of the car or the loan. Always look around so you can arm yourself with the right knowledge.

Don’t let this shy you away from dealer financing. Sometimes financing with your dealer can be quite advantageous to the buyer. This is because of where the dealer’s priority stands. Most dealers will make money from the sale of a vehicle and also from the financing of the vehicle. Dealers almost always make more money from the sale of the vehicle so sometimes making easier financing options just to get their cars moving is something they are happy to do. This means that dealer financing might have buyers see fewer financing concessions and more relaxed guidelines. This happens more often in new vehicle dealerships that have their own in-house financing arm.

Another new and innovative way to get your car loan is to use the “dealer network system”. It is basically a site that is linked to by all the dealers that have an online presence and offer financing. What you’ll need to do is to enter your information into the site then the system will match your credentials with dealers that can work with what you got. Please note that this service is free of charge and is just a referral service. If you have bad credit and can’t seem to find the right dealer then this is often a very effective way of getting an auto loan with the right dealer. Naturally, this is one way to get your information out there and potentially have many dealers call you about their products. If you really can’t find a dealer that can service your loan needs then you can turn to the “dealer network system”.

Another thing to consider is “Application Services” which can be found in their hundred on the internet. These are basically mass mailers which will take all you information and contact every lender in their database to look for offers and approvals. One of the perks of using this service is that you can get very good rates from some lenders that you’ve never heard of before.

Even if you find that you are rejected multiple times by lenders don’t give up. With the right level of gumption and some luck you will get the right loan and the vehicle of your choice.