Tuesday, November 3, 2009

How To Get A Car Loan With Bad Credit

--> -->Banks are in business to accomplish two main objectives: to give out loans, and at the end of an agreed period to get back the amount loaned plus interest. A bank that fails in these two areas will soon cease to be a bank, which is why banks view the loan applications of people with bad credit as forbidden fruit.

Anyone with a bad credit tag to his name is assumed to have demonstrated that he is financially irresponsible. It does not matter if the assumption is right or wrong. A bank that is willing to consider a bad credit loan application is, in fact, facing an actual rather than a potential risk that the borrower may default on the loan.
  • Still, a bank may agree to give a car loan to a person with bad credit if he will convert it into a secured loan, where the borrower agrees to offer a collateral in physical property such as a house, or financial instruments such as shares and bonds to secure the loan. 
  • People with bad credit are expected to pay higher down payment and higher interest rate on unsecured car loans, in order to reduce as much as possible the loss the bank will suffer should they default on the loan.
  • Depending on how bad the borrower’s credit is, the down payment required can range from 20 – 50% of the car’s selling price, interest rates from 5-26%, and amortization - the duration of the loan - anywhere from 2-4 years. The amortization for a buyer with good credit is 5-7 years.
  • While it may appear that those with bad credit are really in for tough times, it may not be all that bad. 25% of Americans: a little over 75 millions people, in one form or another, have credit problems. The huge number of people with bad credit has turned into an opportunity for companies, which have found ways to make money from car loans to people with bad credit. In effect, those with bad credit will always have access to car loans.
  • There are some bad apples among these companies though. Car dealers who specialize in bad credit loans will take a car selling for $6,000, inflate the price to $9,000, take a $2,500 down payment and then finance the $6,500 at 24-26%. This will put the buyer into debt with the auto finance company for an inflated price that is higher than the real value of the vehicle.
  • A way to avoid being swindled by these sneaky bad credit car loan dealers is to first check the real value of the car you are looking at, and then only pay $200-500 extra then what is listed. Only in exceptional cases would you ever pay more than this price for a car.
  • With the coming of the Internet economy, two ways have emerged to provide car loans to people with bad credit. In the Dealer Network System, the buyer selects a car on a website and answers some basic questions. This information is passed onto a dealer specializing in bad credit car loans.
  • In the Multiple Submission Networks, the person with bad credit applies online for a car loan, and his financial information is then sent to several lenders at the same time, with the hope that one or more will agree to take the credit risk.
  • Review your credit report at least 3 months before applying for a car loan, as any correction you make will take that long to show up in your credit report. Know how much you can comfortably afford to pay both on the down payment and monthly payment, and have proof of employment and income.
Your best chance of getting a car loan, with a bad credit history, is to start preparing at least a year before your application. Assuming you have a stable job, apply for a gas station or departmental store credit card. Pay your bills on time for 12 months: paying $10 –$20 more than the minimum monthly payment. With a 12 months clean history of paying your bills on time, the bank will look at your car loan application differently. 

1 comment:

  1. Good informative blog. Am very much thankful to this blog for sharing the valuable information.