What are Bad Credit Auto Loans?
Just as the name implies, bad auto loans are designed specifically for people who have poor credit. Keep in mind that every lender has unique criteria for qualification, meaning the exact interest rate and terms will depend on several things to include your FICO score. In addition, some financial institutions have cut-offs so if your score is too low, you would be advised to work on your credit for about six months to make improvements.
Unlike more conventional loans, bad auto loans are considered sub-prime, which means interest and terms are not as good as good credit loans. The reason is that because you have bad credit, whether due to poor money management on your part or some other reason, you are deemed “high risk”. In other words, in the lender’s eyes, there is a greater chance of you defaulting on the loan compared to someone with good credit. To balance out that risk, lenders charge a higher interest rate and offer tighter terms.
Pros and Cons
On the plus side, bad auto loans make it possible for people just like you with poor credit to secure lending. If you need a vehicle but know your credit is not great, this type of loan is available but you need to expect to pay higher monthly payments. If you can take time to improve your credit score that is the way to go but if not, bad auto loans are viable options.
On the down side, you will pay high interest. What that does is increase the overall amount of the loan. At the end of the loan, the amount paid is going to be thousands of dollars more than if you secured a loan with good credit. Then as mentioned, the terms of the loan will not be as flexible. The bottom line is that the higher your credit score is the better the loan.
Most lenders are honest and understand that things happen to affect credit. These lenders still have to charge higher interest and be stricter with terms but they are fair. Unfortunately, some lenders prey on people with poor credit, taking advantage of the situation by offering loans with outrageous interest. Because of this, it is essential that you look at multiple lenders to find the best one.
If you currently have a checking and/or savings account, or perhaps financed a vehicle with one particular financial institution prior, this would be the first place to start. If this lender does not offer loans for people with poor credit, take some time to look at different possibilities by making comparisons online.