Why It Doesn't Pay to be a Payment Shopper

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Automotive Content Editor

Meghan Carbary has been writing professionally for nearly 20 years. A published journalist in three states, Meghan honed her skills as a feature writer and sports editor. She has now expanded her skill-set into the automotive industry as a content writer for Auto Credit Express, where she contributes to several automotive and auto finance blogs.

, Automotive Content Editor - February 16, 2021

When your only concern is how much you spend on a single monthly payment, you often forget to look at the big picture. This can hurt your bottom line if you're not looking at the overall cost of something big – like your car loan.

Payment Shoppers Spend More

Payment shoppers are typically people that are only concerned with a short-term solution to saving money. This often means stretching loan terms to get the lowest monthly payment they can on an auto loan. Doing this can make things fit more easily into a budget, but the longer it takes to pay off a loan the more money you're spending in interest charges.

For instance: if you're approved for an auto loan of $20,000 with a 13% interest rate, and a $2,000 down payment for 48 months your loan payment is $482.89. In the four years of your loan term, you're paying over $5,000 in interest charges and over $23,000 for the loan (not including taxes, surcharges, and fees, which vary by state and individual situation).

If a nearly $500 car loan isn't in your budget each month, you may be tempted to ask the lender for other loan term options. A payment shopper may opt for the longest term the lender has to offer, let's imagine that's a seven-year loan or 84 months.

If nothing else changes about the financing contract, your monthly payment drops to $327.46 – much more manageable. However, you're now chipping away at your balance more slowly for a longer period of time. The additional three years of this loan cost you over $4,000 more in interest charges.

Bad Credit Borrowers and Payment Shopping

Often, you have to do what it takes to get the vehicle you need, but slowly chipping away at a large car loan balance isn't always easy to manage long-term. Bad credit borrowers sometimes get caught in a cycle of payment shopping out of necessity.

This can happen when something unexpected drops your credit score such as job loss, sudden illness, medical bills, or having to move unexpectedly. This is called situational bad credit, and lenders can tell when your bad credit situation may have been out of your hands. They can also tell when a borrower's credit is bruised by their own actions, called habitual bad credit.

Since bad credit borrowers may only qualify for higher interest rates, it can raise the cost of vehicle financing. In turn, they may have no choice but to choose the longest loan term available to them, which could mean paying more than the vehicle is worth or constantly being stuck in a negative equity position.

Preparing for a Bad Credit Auto Loan

There are several routes you can take to get out of a payment-shopping cycle and prepare for auto financing. Improving your creditworthiness may be as simple as adding a car loan to your credit.

Whether you have situational or habitual bad credit, a subprime lender is most likely to be your route to an auto loan. These lenders look at more than just your credit score to determine your auto loan eligibility. They also look at your overall bad credit situation using factors like your income, employment, residential stability, and your willingness to make a down payment.

Consider these big-picture tips to prepare for your next car loan:

Know where your credit stands. Knowing what's in your credit reports and where your credit score falls on the FICO credit scale is a good first step to an auto loan. When you know where you stand you can research average interest rates and stand your ground when negotiating your loan.

Build a car buying budget. Knowing how much you can comfortably spend on a vehicle is important. Lenders want to make sure that you're not overextended before they approve you for a loan. To do this, they calculate both your debt to income (DTI) and payment to income (PTI) ratios. These tell you how much of your income is available after paying your bills each month, including an estimated auto loan and insurance payment, and how much of it goes to your car loan and insurance.

Opt for the shortest loan term you can. Payment shoppers often stretch their loans without looking at the big picture. Instead of being a payment shopper, choose the highest monthly payment you can comfortably afford for the shortest amount of time possible. This saves you money in interest charges over your loan term.

Make the biggest down payment you can. The more you pay upfront, the more you can potentially save because a down payment reduces the vehicle’s selling price. Subprime lenders typically require bad credit borrowers to bring in a down payment of $1,000 or 10% of the vehicle's selling price, sometimes whichever is less. Making a larger than required down payment may allow you to qualify for a lower interest rate, a shorter loan term, and/or a better vehicle.

Choose an affordable vehicle. To get the most bang for your buck, choose an affordable, reliable vehicle that holds its value. Automakers such as Toyota, Subaru, and Honda are known to last a long time. If you're looking for peace of mind along with an affordable vehicle opt for something a little newer – newer cars typically qualify for a lower interest rate. A good option for credit-challenged consumers may be to look into financing a certified pre-owned (CPO) vehicle.

Pay ahead on your loan when you can. If you want to save money in the long run, paying off your auto loan faster than scheduled is a good way to save money in interest charges. Most auto loans are simple interest loans that accrue interest daily based on the principle of your loan.

Pay taxes, title, and license fees upfront. In most cases you can roll the tax, title, and license fees into your auto loan with the rest of the charges or add-ons you agree to in your contract. However, if you do, you're increasing the balance of your loan, and you'll end up paying more money in interest charges. If saving is the name of the game, find out ahead of time how to calculate these charges in your state, and plan to pay them out of pocket when you sign the auto loan.

Work with a lender that's right for your situation. Not all dealerships and lenders work with people who have less than perfect credit. Subprime lenders are typically signed up with special finance dealers, and you work with the finance manager at the dealership as your go-between. In order to be as prepared as possible for your car buying process, make sure you know what to bring with you to the dealership, and what kind of documents and information the lender requires in order to approve you for an auto loan.

Let Us Help You Get Started

Being a payment shopper doesn't pay. In fact, it can cost you thousands more in auto loan interest charges. Instead of striving for the lowest monthly payment you can, make sure you balance your loan term with a payment that doesn't break the bank. Remember, successful loan completion is the name of the game, and it can lead to credit repair and the chance at a better car loan deal next time around!

If you're ready to get started toward your next auto loan, let CarsDirect get you on the path to success. Over the last 20 years, we've gathered a nationwide network of special finance dealerships that are signed up with subprime lenders that want to get you into the loan you need. We can connect you to a dealership in your area after you fill out our fast car loan request form. The process is free and there's never any obligation to buy. What are you waiting for? Get started now!


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, Automotive Content Editor

Meghan Carbary has been writing professionally for nearly 20 years. A published journalist in three states, Meghan honed her skills as a feature writer and sports editor. She has now expanded her skill-set into the automotive industry as a content writer for Auto Credit Express, where she contributes to several automotive and auto finance blogs.

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