Getting Low Rate Car Loans with Bad Credit

Get Car Financing
Even with poor credit.

January 27, 2012

Low rate car loansare something most people with bad or poor credit don't often have a chance of receiving. By definition, bad credit refers to a person's past inability to meet his or her obligations to previous lenders; therefore, by extending a car loan to a person with bad credit-the bank or lender is taking on significantly more risk than they normally would with a person that has a good or excellent credit history. In short, to make the increased risks worth their effort, banks will seek a high return on their investment. Thus, a much higher interest rate will usually be required.

Expect Higher Interest Rates

For people with bad credit, typical car loan interest rates can range from as little as 10% to as high as 25 to 30%. Furthermore, many times people with bad credit are at the mercy of the bank or the lender (when it comes to interest rates) that offers to make the loan. Many car dealers refer to this as "buying back your credit," and it can be very expensive and burdensome for those with bad credit who need to finance a new or used car.

Although it is very difficult for people with bad credit to get a reasonable interest rate on a new or used car loan, it is not impossible. There are things that you can do to help improve your chances of lowering the interest rate associated with a car loan.

Make a Bigger Down Payment

More cash always helps. When negotiating the term and interest rate of a potential car loan, offering to put up more money as a cash down payment can give the lender more incentive to provide you with a lower interest rate. The reason is simple-a greater down payment means less risk to the bank.

If you can come up with a down payment that significantly reduces the amount of the loan required to purchase the car, your lender will probably be much more willing to offer you a more attractive rate. Because the amount financed will probably be much less than the actual value of the car, your lender will have less exposure to potential loss. If you default on the loan, the lender can simply sell or auction off the vehicle and recover their investment.

Why Banks Like Cash

In addition to reduced risk for the bank, there is another reason that banks or lenders are usually willing to offer lower interest rates (even for those with bad credit), if you provide a larger down payment. Lenders know that it is much less likely for you to default, or walk away, on an obligation that you have a lot of your own cash invested in. Statistically, loans with large down payments are generally paid off much quicker, and more reliably, than are those loans that require little or no down payment.

Consider a Cosigner

Other options to consider when searching for a low interest car loan when you have bad credit are using a credit worthy and financially stable cosigner or putting up a savings account or real property as collateral.

There are ways to reduce the interest rate of an auto loan, even if you have bad credit, but they do require some commitment and sacrifice. However, in the long run you can save thousands of dollars in accrued interest alone.

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