Bad credit car loans and loan terms
by Steve Cypher on Friday, July 4th, 2008A bad credit car loan means you will pay a higher rate of interest than a regular car loan. The high interest rate means more money out of your pocket just to finance your car. There are ways, however, that you can cut down on the amount of money you spend on interest charges. Here is one of them.
What we know at Auto Credit Express
Here at Auto Credit Express, we are in the business of helping our customers reestablish their credit by financing their vehicles through dealers that specialize in bad credit lending. One of the things that you can do to make it less expensive is to adjust the term of the loan.
Shorten the loan term
Although a shorter term will raise the monthly payment, it will lower the amount of interest that you pay on the loan. For example, if you finance a car with a selling price of $15,000 plus tax (7%) and a down payment of $2,000, with fees of $120 (non taxable), the amount of the loan comes to $14,170 (you can duplicate this process by going to our loan calculator).
If you finance this amount for 60 months, your payment will be about $337 per month. The amount of interest that you will pay over the life of the loan will be $6034. Now, if you were to reduce the loan period to 48 months, the monthly payment would increase to $394 (about $2 a day), but the amount of interest would drop to $4742 – a decrease of almost $1300 when compared to the five year loan (again, you can use our loan calculator to verify these figures).
Car loans and the dreaded negative equity
There is another big benefit to shortening the loan term. Everybody knows that a car loses its value as soon as you drive it off the lot. In fact, if you owe more on your car that it appraises for when you go to trade it in, you have what is known as “negative equity”. This means the NADA book or Kelley Blue Book value of the car is less than what you owe on it. The solution is simple. By shortening the loan term and paying more every month, you will substantially reduce the negative equity problem in the early part of the loan. Then, when you are ready to trade in you car in order to get a new car at a lower interest rate, you may actually have equity in your trade-in.
In other words, by financing for a shorter period of time, you have turned a negative (no equity or negative equity in your car) into a positive (no negative equity and possibly trade equity in your car).
The Bottom Line
If you need to get a car with a bad credit car loan, you have to look at the process as a stepping stone to better credit. Finance the car for the shortest loan period that you can afford. Make your payments on time and use this as a step in reestablishing your credit. Our web site at www.autocreditexpress.com has additional information as well as other calculators that will help you determine how much car you can afford. As always, we hope to see you “on the road” to credit health!
