A good credit auto loan works just the same as if you were to go to your local bank, but people with not so great credit would have to supply a larger down payment and probably have a higher interest rate. Take heed though, because most lenders will not take the chance on people with bad credit. The down payments and interest rates can vary depending on how bad your credit really is.
For example, the down payment could be anywhere from 20% to 50% down and the interest rate can be as high as 26% depending on which state you live in. There are a few cases where people already own vehicles and will use them as collateral for some short-term loans. These types of loans can have an interest rate of 144% per year.
Title loans offer short-term loans, but beware because the interest rate can be 12% per month, so if you do not pay it off within the month you will have to acquire a second 12% loan until it is paid off. Having to take out a second loan is illegal in most states and does not make your financial situation any better.
Most of the time, lenders just make the applicant with bad credit pay the higher interest rate, which can range from 7% to 18%. The amount of time needed to pay off your loan in full, also called amortization, can range from two to four years. If you had good credit that range would be extended to 5 to 7 years.
Rebuilding Bad Credit
Compared to people with excellent credit, the amortization schedules and higher interest rates will make it appear that you have a much higher monthly payment. If you make all your payment on time, this loan will only aide in your rebuilding of your credit. Automobile dealerships often broadcast that they are willing to work with those with bad credit, but they themselves, work specifically with those lenders that have the particular programs designed for bad credit. Internally dealerships will work out the details with the bank, meaning that the loan can remain unpaid until so many payments have been made. This insures that the bank will get paid for the loan, and the dealership stays on good ground.
Be Careful And Shop Around
There are some lenders out there that bend the rules of a bad credit loan. There have been some that inflate the price of the vehicle or even the interest rate to make a good deal. What they do is take a car that is normally sold for $3,000, inflate the price to $6,000, have the down payment be $1,500 and the interest rate as high as 26%, and then they advertise that they specialize in bad credit programs.
The problem is that the person with the bad credit now gets a vehicle that is no where near the value of the car, but are indebted to paying the rates because of their financial situation. Because of the high rates, most people will default on this type of loan, which just makes their credit worse. If the borrower had gone to a legitimate dealer, they would avoid paying double or even triple the value of their vehicle.
The point to be made is to be aware of what could happen when dealerships advertise such a program. Knowledge is a very useful tool. By knowing what programs are out there, and the value of the specific car can help you make better decisions that affect your financial situation.