Bad credit auto loans are a dangerous proposition. They have high interest rates, poor terms (like early payment penalties) and require large down payments. Auto loans for people with bad credit are only good for creditors. There are some bad credit loans and lines of credit that are beneficial, believe it or not, but those are limited to small amounts. Large loans, like auto loans, have high monthly payments, or they have long term loans that interest payments pile up on. Auto loans for bad credit are just not smart at all.
But if you do have bad credit, is there a better way to finance than auto loans with bad credit? Of course! While bad credit isn’t easy to overcome, it isn’t impossible. There are steps you can take to improve your credit situation. Once you understand how credit works, it’s easier to take the steps to improve it.
Credit is based on a number of factors. While many people think credit is based on payment history, that is only part of it. Imagine your credit score as a pie divided into pieces. One piece, a big one, is based on your FICO score. Another piece is your job and home longevity. Yet another very important piece of the pie is your debt to income ratio. And a piece for your total income. Each piece plays a part in determining whether the lender will approve the loan and what interest rate and for how much they will loan.
Your FICO score is your credit history based on what is reported to the credit bureaus. It includes your payment history, how much outstanding debt you have, how long you’ve used any credit (are you a first time borrower etc), how many new credit accounts you’ve opened or applied for and what type of credit it was (mortgage and auto loans for instance are scored differently, as are credit cards and personal loans). If you have a poor payment history, the best way to repair that is to get a secured card, if unsecured isn’t possible, and make timely payments for 12 months straight. Closing out low balance and lower limit cards helps improve the score. Believe it or not, less cards with higher limits are better than many small cards with low limits.
The longer you live in your home and work at your job, the better credit history you have. If you’re just starting out, this is can be a big problem. The only way to resolve it is to get a co-signer on your loans, or a secured credit card. Although, you’ll still have to wait a year to get a good rate on your auto loan.
Your debt to income ratio is the amount of debt you have, monthly, divided by the amount of income you have, monthly. This percentage should be around 28%(in an ideal world) and no larger than 36%. Anything higher than 36% is going to get you dinged into the bad credit interest rate ranges. Reducing your debt will raise this amount, increasing your chances of better loan terms.
The bottom line is auto loans with bad credit cost more money than they’re worth. Buying an $18000 used car at a 500-580 credit score brings your 48 month interest paid to 8,791. The interest rate is average around 21% for that FICO score. Raise your score to just a smidgen more, at 620 and you can save nearly $3000 over the life of the loan. Now that’s a smart idea.