5 Things to Know About Bad Credit Car Loans

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Even with poor credit.

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Megan Foukes is a recent graduate from Indiana University who graduated with a bachelor’s in journalism. Megan works as a content writer for Auto Credit Express and contributes to several automotive and finance blogs.


, - October 5, 2018

Taking out a bad credit car loan isn’t a bad thing. Bad credit auto loans are designed to help borrowers get a car and the financing they need to help improve their credit. But, in order to take out a bad credit car loan, a potential borrower needs to prepare themselves. Beyond the basic requirements that need to be met, there are five things that borrowers need to know when taking out this type of loan.

How are Car Loans for Bad Credit Different?

Someone with bad credit can find it difficult to get approved for a car loan because traditional lenders place a heavy emphasis on credit scores. When someone’s credit is poor, subprime lenders can still approve them for a bad credit car loan. Before a potential borrower walks into a dealership seeking a bad credit auto loan, there are five things they need to be prepared for:

1. Higher Interest Rates

With bad credit, higher car loan interest rates are hard to avoid. This is because your interest rate is largely determined by your credit score. A buyer taking out this type of loan could be paying as much as 10 percent or more above typical interest rates.

2. A Bigger Down Payment

A down payment is required by the lender. The down payment reduces interest expenses and signals to the lender that you’re serious about successfully completing the loan. The down payment requirement is typically $1,000 or 10 percent of the vehicle’s selling price, whichever is less.

3. Limited Car Selection

Because bad credit car loans are for borrowers with credit issues, this means they shouldn’t be looking at their dream vehicle. Car selection may be limited depending on what you qualify for and can afford. Be prepared to look at a selection of affordable vehicles. Typically, this includes lower mileage used cars and some certified pre-owned vehicles.

4. The Danger of Longer Loan Terms

Long-term loans are usually not be the best option, and this is even more true for borrowers with imperfect credit. While a borrower’s monthly payments are lower with a longer term, interest charges are higher, and the loan becomes more expensive in the end.

5. A Last Resort Option

If a borrower is having trouble getting financed and needs a car as soon as possible, the last resort is usually a buy here pay here dealership. These dealers typically won’t run credit checks, and usually only require proof of income in order approve an auto loan. The downsides to these lots are the lack of car selection, and the fact that most of these dealerships don’t report loans or payments to the major credit bureaus, so this won’t help improve credit.

Why You Should Get a Bad Credit Car Loan

The biggest drawback to taking out a bad credit car loan is the overall cost. But with careful planning, it doesn’t have to be a burden to finance a car when you have bad credit. In fact, a bad credit auto loan can really benefit you in the long run if you’re unable to get approved for a traditional car loan. What you can get out of a bad credit auto loan can include:

  • A more reliable car – You don’t have to settle for an old, unreliable car when you get a subprime car loan. Many dealers that work with subprime lenders have lots full of reliable used cars that can fit with what you end up getting approved for.
  • A chance to build credit – Taking on a car loan can build credit and improve your score by making your payments on time. If your credit score improves enough, you can refinance for a better interest rate after a few years of on-time payments or trade in and get an even better car.
  • A chance to budget and save – While the overall cost of a bad credit car loan can be hefty, taking out one of these types of auto loans can help you better budget and plan for your next car loan. You also can learn valuable finance lessons with a subprime car loan, and set extra funds aside for emergencies.

At the end of the day, a bad credit car loan can help more so than hurt you. If you just need any old car to get you by, you can visit a buy here pay here lot. But taking on a subprime car loan can put you in a better situation financially and credit-wise.

Be in the Know

The more prepared you are, the smoother the car buying process can be. Knowing how the process differs from a traditional loan relieves some stress.

If you find yourself struggling with bad credit and need a vehicle, CarsDirect wants to help you find financing. Let us guide you toward a local dealer with our nationwide network of new and used special finance dealerships. It’s simple to get started by filling out our no-obligation, free auto loan request form online.

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Megan Foukes is a recent graduate from Indiana University who graduated with a bachelor’s in journalism. Megan works as a content writer for Auto Credit Express and contributes to several automotive and finance blogs.


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