Bad Credit Auto Loans

You’ve got to get to where you need to go, regardless of your credit, and bad credit auto loans can help you get there.

Bad Credit Auto Loans Are Secured

Bad credit auto loans are secured loans, which means they are tied to collateral, in this case, your car. If you don’t repay your bad credit auto loan, the lender can repossess your car. Secured loans, such as bad credit auto loans, usually have lower interest rates than unsecured loans. But if you have bad credit, those interest rates go up.

Bad Credit Auto Loans for People with Bad Credit

People with bad credit have difficulty getting loans because bad credit indicates that you have not been responsible with your debt. Lending to people with bad credit can increase the risk of not being repaid, and many lenders will not take that risk.

Bad credit auto loans, however, are designed for people with bad credit, so lenders are aware of the risks involved. In order to make up for the risk of not being paid, lenders charge higher annual percentage rates, or APRs. APR is the annualized interest rate charged and is used to compare loan rates.

Bad Credit Auto Loan Costs

Higher interest rates? Not a problem - right? Make sure you understand how higher interest rates can affect the cost of a bad credit auto loan before jumping into one.

Borrowers with good credit are often offered lower interest rates than people with bad credit. The interest rates offered can vary, but I will compare 2 interest rates to give you an idea of how interest rates can drain your bank account.

  • Auto Loan Amount: $20,000 // $20,000
  • Auto Loan APR: 6% // 9%
  • Monthly Payment: $470 // $498
  • Total Interest Paid: $2,546 // $3,890
  • Total Loan Amount: $22,546 // $23,890

The comparison doesn’t take into consideration the sales tax you may have to incorporate into the auto loan or any down payment you make; the table is just meant to illustrate how loan costs are affected by interest rates.

Having a $20,000 auto loan with an interest rate that is 3% higher results in a monthly payment that is nearly $30 more each month. In addition, you end up paying $1,344 for the loan. Keep in mind that these costs increase with the bad credit auto loan amount you borrow.

Knowing the costs of the loan is half the battle. Now you have to weigh all your options, including any alternative options.

Alternatives to Bad Credit Auto Loans

Improve Your Credit

If you have time, consider improving your credit before you get a bad credit auto loan. If you take the time to understand what makes up your credit score you may realize you can quickly improve your credit.

It’s also likely that increasing your credit score will take some time. You have to decide if you want to take the time to improve your credit for better interest rates.

Save for a Down Payment

The larger the down payment, the lower the bad credit auto loan. If you hold off on getting a bad credit auto loan until you have saved up a reasonable amount of cash to put down for the car, you can significantly lower your monthly payment and the interest you pay over time.

If you pay down $2,000 cash for your car, reducing the amount of your 9% bad credit auto loan to $18,000, your monthly payment will be lowered to $448 per month - $50 less than what you would have to pay for a $20,000 loan. So saving up for a down payment will save you money in the end.

Pay Cash for a Car

Saving up to pay for your car outright will also save you money that would have been paid out towards interest. In addition, paying for your car with cash means you don’t have to worry about a monthly payment, which will make it easier when it comes to budgeting and paying the bills.

Don’t Get a Car

Some people absolutely must have a vehicle to get to their work or accomplish what they need to do. Others may have occasional access to a vehicle (perhaps sharing with a spouse) or be in a better situation to consider alternatives.

Public Transportation

Public transportation is an affordable way to still get to where you need to go. Whether you take the bus, the subway or the train, you don’t have to be the one driving in traffic and you can still avoid bad weather (for the most part). Using public transportation means that you don’t wear down your car, which can save you in maintenance costs later down the road, literally.

One drawback of relying on public transportation is that you run on a tight schedule - and it’s not your schedule. Destinations are also limited, so you may not be able to get a ride anywhere you want.

Bicycle Commuting

Bicycle commuting has recently increased, especially in cities that have taken initiatives to make the streets more bike friendly. Biking to work saves gas money and car maintenance fees, and if the daily workout is sufficient, you can stop paying for gym membership.

Bicycle commuting may not be an adequate option if the weather is bad 6 months out of the year. You also have to be willing to show up to work sweaty every day.

Telecommuter?

In this day and age, there are a number of people that telecommute, or work from their computer at home. If you believe you can have the self-discipline to do your work at home, you may consider asking your boss about changing your status to telecommuter. Not having to worry about driving to work means you don’t have to worry about owning a car. For the most part.

Bad Credit Auto Loan Final Considerations

Something that borrowers tend to forget is how quickly cars depreciate, or lose their value. In fact, cars start to depreciate the moment you drive them off the parking lot! If you purchase a car for $60,000, the likelihood of selling it back for that amount or more is slim.

Since cars depreciate so quickly, many people have looked into purchasing vehicles that aren’t brand-spanking new. Used vehicles can offer people what they need (transportation) at a reasonable rate. If you’re considering used vehicles, just make sure you don’t get one that has so many problems you end up spending as much on it as a new vehicle.

There is a lot to consider when deciding on a bad credit auto loan, so take your time and compare your options.