The ongoing economic crisis has made financial institutions more conservative than ever before in approving consumer loan applications. Individuals with less-than-perfect credit histories can sometimes find it extremely difficult to secure any kind of conventional loans from banks and credit unions these days. This is especially true in the case of automobile loans where lenders are applying very stringent standards for assessing the credit worthiness of potential borrowers. Credit scores that used to be considered ‘Excellent’ even two years ago are now considered just “Good” and individuals with credit scores of less than 680 can find it next to impossible to secure traditional auto loans.
These are car loans that are meant for individuals with low credit scores, previous vehicle repossessions or even a recent bankruptcy. They can be used to finance both new and used car purchases.
Such loans are often offered by car dealers themselves who in turn fund the transactions via direct lenders. In some cases, large car dealers may fund bad credit auto loans entirely by themselves. Depending on the amount of paperwork involved or documentation required, poor credit car loans can be approved in a single day. Many car dealers these days routinely extend financing options for those with little to no credit, so that might be a good place to begin the search for bad credit auto finance. Numerous Web sites and portals are also available where individuals can search for bad credit lenders.
Even though such loans are designed for those with bad credit, there still is some eligibility requirements that borrowers need to meet. For instance, prospective borrowers need to show that they have a gross monthly income of at least $1,500 to $2,000 per month. Borrowers also need to have had no repossession action against them over the past 12 months. In some cases, an individual with a really bad credit history or one with no credit history may need to bring in a co-borrower for the loan to be approved. Many lenders also insist on borrowers being legal residents of the CA who are at least 18 years of age.
In general, bad credit loans carry higher interest rates compared to conventional loans extended to individuals with good credit. Because bad credit financing by definition involves a higher degree of risk, lenders often can charge anywhere from 8% to 18% for such auto loans depending on how severely impaired an individual’s credit score is. In some cases interest rates can even go up to more than 25%. In comparison a borrower with excellent credit can obtain an auto loan for around 5% these days.
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Lenders of bad credit auto loans also often require individuals to make higher down payments on their vehicle purchases compared to those with good credit.
In rare instances, no down-payment options may be available to those who are patient and willing enough to look around for them. However, a no down-payment bad credit loan often will mean higher interest rates, so over the loan term an individual who takes out such a loan could end up paying substantially more in interest fees. In addition, bad credit auto loans are usually amortized over a shorter time period, meaning borrowers have a smaller time frame to repay the loan. For instance, individuals taking out a bad credit loan may be required to pay back the loan over a three-year period, while an individual with good credit may have 5 years to repay the same amount. Despite such caveats, these loans do offer an attractive option for those unfortunate enough to be saddled with a bad credit score. Those who are diligent about repaying their loans can find themselves improving their credit scores even if they end up paying slightly more in the process.
But as with any financial transaction, care needs to be taken to ensure that bad credit loans do not end up landing the borrower in even more fiscal trouble than they are in already. In many cases individuals taking out such loans are vulnerable to extortion and outright fraud by dealers looking to exploit the situation. Since individuals with bad credit often have no other place to go to secure financing, unscrupulous dealers can grossly inflate the price of the vehicle and tack on numerous additional, unnecessary charges. One common tactic that is employed by dealers is to get buyers to sign up for additional warranty protection on their vehicles on the pretext that lenders require them to carry such warranties. In some cases, a dealer might insist on the buyer making a very high down-payment or be faced with even higher interest rates.
Individuals who have a poor credit history need to be aware of such potential pitfalls when looking around for an auto loan.
Before going to a dealer it is always a good idea to research all of the options that are available and to take the time to understand all of the terms and conditions associated with a bad credit auto loan. It pays to do comparison shopping to ensure that you are getting the best possible deal under the circumstances.
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