These days, if someone has bad credit, there are many choices available when it comes time to buy a car.  Most dealers now have a special finance, or sub prime auto finance department to help people with bad credit buy a new or used car.  Twelve years ago, when I was first introduced to special finance, there were only a handful of national lenders in the US that catered to people with bad credit, and none in Canada.

At that time, in house, buy here pay here financing at the car lot was more popular.  These “We Finance Car Lots” would extend credit directly to consumers so they could buy a car from their lot.  There were few finance companies that serviced the bad credit market.  The lenders that did offered only short terms and high interest rates.

Over time, more and more finance companies entered the sub prime arena.  To stay competitive, lenders had to offer lower payments, which meant better rates, as well as longer repayment terms.  The first bad credit auto loans, for example, only offered 48 month loan terms.  Today, it’s common for a person with bad credit to finance a newer car for 72 months; some automobile lenders even offer 84 month financing.

It is true that a longer repayment term will result in a lower payment, or allow you to buy a more expensive vehicle and have the same payment.  If you have bad credit, however, the fact is that a longer repayment term may do you more harm than good.  I’ve always recommend that people with bad credit buy an affordable car that suits their need, not a car that looks good in their driveway, or impresses folks at the office.

If you have bad credit I recommend buying a car and financing it through a national auto financing company, not a buy here pay here lot.  Finance the vehicle for as short a term as possible, for example, 24, 36, or 48 months.  If you make your car loan payments on time, short term financing will allow you to trade in your vehicle around ½ way through the loan.  After that the next car you finance will be at a better interest rate.

After your first car loan, your credit may not be completely re-established. If it is not, finance the next vehicle with a short term as well.  Keep doing this until you qualify for the best interest rates available.  Once you qualify for the best interest rates, then, and only then, consider financing your dream car at extended terms.