by: Peter Lenkefi
Internet surfers with bad credit looking for an auto loan are bombarded with advertisements most days. Many of these ads are truthful in their bad credit auto loan options. However, there are many things to avoid, and this article will describe some of those.
Directly financed auto loans for people with good credit are a bit different than those with bad credit. People with bad credit are expected to pay more of a down payment as well as a higher interest rate on their auto loans. Many creditors won’t even extend an auto loan to those with bad credit. Depending on how bad someone’s credit is, auto loans can range from a 20 – 50% down payment requirement, interest rates from 5-26%, and amortization (the length of the loan) anywhere from 2-4 years.
This may sound like a lot of bad news for bad creditors looking for an auto loan. But with some good planning and foresight, these auto loans can actually help people with bad debts rebuild their credit history.
The worst situations in bad credit auto loans show up when car dealers artificially inflate the pricing or interest rates on their cars. Auto dealers who specialize in bad credit loans will take a car normally selling for $5,000, inflate the price to $8,000, take a $2,500 down payment and then finance the purchase at 24%. Now the bad creditor will be in debt to the auto loan company for an inflated price that isn’t indicative of the vehicle’s real value. A way to counteract these types of sneaky bad credit auto loan dealers is to check the value of the car you are looking at, first, and then only pay $200-500 extra then what’s listed. Only in exceptional circumstances would you ever pay more than this for a car.
Two different ways of selling a car have emerged recently with the new, Internet economy. The first is called the ‘dealer network system’. Auto purchasers can get a loan regardless of their bad credit history with this option. Essentially, a potential customer looks at a car on a website, and then answers some basic questions if interested in buying. This information is then passed along to a dealer specializing in bad credit auto loans. Since there are no fees involved, this can be a real boon for the bad creditor looking for a decent car loan. However, with this system, there is no way of researching the auto dealership you are about to do business with.
The other new option is called an application service. In this situation, a person with bad credit applies online for an auto loan, and the financial information is then sent to multiple lenders at the same time, with the hope that one or two will be willing to take the credit risk. If the system works, several dealerships with fight for the customer, using price and convenience as their selling points.
Choose the wrong auto loan and you might drastically increase the chances of defaulting and losing your car. Find out step-by-step how to avoid a money pit.
Car loans are certainly less costly than home mortgages, student loans, or other kinds of loans. So why do so many people end up defaulting and losing their cars? Find out these hidden dangers:
Biggest Hidden Car Loan Danger: The Inherent Money Pit
Unlike home mortgages, student loans or other big-ticket loans, car loans are inherently money pits. A house can build equity; higher education can increase earning potential; even jewelry can sometimes be re-sold for as much as was paid for it. If you borrow to buy one of those things, you may eventually get a return on investment. But every single car loses significant value and keeps losing it as time goes by.
Solution: spend as little on your car as possible.
Of course, in order to spend as little as possible over the life of the vehicle, you need to get a well-made, fuel-efficient car, rather than the one with the lowest price on the windshield.
But a pickup truck, SUV, sports car, or "luxury" model is a guaranteed money-loser. Don’t worry about what other people will think. Think about it: when was the last time you saw an expensive automobile and thought, "I really like and respect whoever owns that!"
The best buy? Many economists actually recommend buying a used car that's a year or two old. That way you can actually benefit from the fact that cars only drop in value. Even a car that’s just six months old may offer you a substantial savings. Just have it inspected thoroughly so you don't lose what you've saved on maintenance payments.
Hidden Car Loans Danger: Dangerously High Monthly Payments
Unfortunately, most people never figure out the total cost before signing on the dotted line. They end up staying up late at night trying to figure out how to make ends meet. They live in smaller houses. They skip going out at night. They don’t go on vacation.
All that sacrifice to have a brand-new SUV in the driveway!
Take a hard look at your finances, and figure out how much you can pay total each month for your car. Be sure to take into account insurance, tax, maintenance, and fuel. Usually, when people actually do calculate the total monthly cost of the car they’re considering buying, they’re amazed by how high it is.
How Much Car Debt Can You Afford?
1) Make a list of your average monthly non-car expenses, and subtract them from your earnings.
-___your monthly after-income-tax income
-___any other taxes
-___housing (including any fees and property taxes, and utilities)
-___food
-___health insurance or HMO
-___life insurance
-___debt payments
-___401 (k), IRA, or other long-term savings
-___short-term savings
-___telephone, cellular phone, cable, internet, etc.
-___entertainment and fun stuff (be honest!)
-___cost of yearly vacation(s) divided by 12
-___other expenses
= ____what you can spend on a car
2) Subtract your monthly car-related expenses from the amount you have left over from your other expenses.
___What you can spend on a car (from above)
-___Amount you’re spending per month on gas (raise or lower this figure depending on whether you are getting a car with higher or lower gas mileage).
-___Monthly maintenance (remember: your new car won’t stay new long, so maintenance will be an issue).
-___Monthly insurance (remember that for a new car, your insurance premiums may go up).
-___Tax.
= ____ Maximum monthly loan payment.
Now plug the number above into a vehicle loan rate calculator to figure out big of a car loan, and how much interest you can afford.
Final Hidden Auto Loan Danger: Unnecessarily High Rates
If you simply take the first loan the dealer offers you, you are probably paying too much. Do some comparison shopping on the internet, and bring a list of the best loans with you when you negotiate loan terms with the dealer.
Don’t let the dealer cheat you by shifting the cost from the car loan to the car price to the deal on your trade-in. Make sure you get a good deal overall.
Congratulations! You now are far better prepared to stay out of an auto loan money pit than the vast majority of car buyers.
About the author:
Joel Walsh is a regular contributor to Auto Loans :http://cars-auto-loans.com, where he writes about how you can get the best car loan
