When you have bad credit, any loan you can manage to get approved for can seem like a blessing. But is it actually? A bad credit auto loan may actually cause you a lot more problems than you may have bargained for. Here are a few things you should know about before you take that bad credit auto loan.
You have bad credit for a reason
Whether you’ve fallen behind on bill payments or made a few too many late payments, there is a reason that your credit score is below average. Finding out why this is may be useful in enabling you to repair your credit so you don’t have to settle for that bad credit auto loan. But understanding how credit works is important, too. When you have bad credit, it means that you pose a higher risk to your credit lenders. Lending finances is a business endeavor for credit lenders; they make their profits off of the interest they charge on their loans. However, if you seem like too high of a risk, they won’t risk losing their return on you. That’s why people with bad credit get rejected for auto loans.
This is important to keep in mind, because bad credit auto loans aren’t offering loans to individuals in need out of the kindness of their hearts. They know that, because individuals who have bad credit are more likely to get rejected for loans, they can charge higher interest rates on the loans they offer. This is a security measure for them as well; charging higher interest rates works to mitigate the risk of their investment.
What can you expect from a bad credit auto loan?
A bad credit loan is called a Sub-prime loan. The main difference between a Sub-prime loan and a Prime loan is that your Sub-prime bad credit auto loan is going to cost you a higher interest rate. However, there are also usually fees associated with bad credit auto loans—such fees can include fees on obtaining the loan, a higher down payment, and sometimes even payment penalties. On top of that higher interest rate, sometimes a bad credit auto loan requires you to provide some form of collateral on the loan—this can be the car itself, in some cases.
Is it worth the extra cost?
This is something you will have to decide for yourself. If you need the car for work so you don’t end up falling deeper into debt and bad credit, then that’s definitely something to take into consideration. But keep in mind, too, that getting the bad credit auto loan may make your credit problems a lot worse—especially if you can’t keep up to the added cost of fees and high insurance rates. When you are factoring this all together, remember that owning a car also means paying for maintenance, insurance, and gas. Are the fees and high rates going to be too much to manage on top of the normal costs associated with car ownership? You may want to wait on that car purchase if it will be, or you may want to purchase a more affordable used car instead.
Remember that bad credit isn’t permanent. There are ways to legally repair your credit. Talk to a credit repair company today for more information about how you can start recovering your credit rating. Don’t just accept that expensive bad credit auto loan; consider your options in credit repair first so you can buy your dream car without having to pay unmanageable interest rates and fees.