Consumer Car Buying Advice Blog

Before filling out a bad credit car loan application you need to know how both buying and leasing vehicles applies to customers with bad credit.

Lease financing

When you lease a car, you are paying for only that portion of the car you actually use. That may sound a bit confusing, but here’s how it works: when a bank or finance company leases you a car, there are two things that, combined, make up your payment – the interest expense (sometimes called the money factor) and the depreciation expense of the vehicle.

If you lease a vehicle for two years, the bank computes a residual value for 24 months (the value of the vehicle at the end of the lease) and subtracts this value from the price you pay for the car. This is called the vehicle’s “depreciation”. The lender then computes the total amount of interest for two years, adds this to the cost of depreciation and then divides this total figure by 24 (the number of months). Once this monthly amount has been computed, state sales tax is added and, presto, you have a lease payment.

Because this monthly payment is usually lower than a comparable retail (buy) payment, it makes the car more affordable to use (not own, because the lease company “owns” the vehicle). But because you are paying only a percentage of the actual value of the car and you will very rarely have any equity in it, banks usually reserve leasing only for their best customers. Because of this, leasing is not a realistic option for customers with bad credit.

Retail financing

Buying, or retail financing, is where the consumer finances the entire cost of the car, although most bad credit lenders will require a minimum 10% down payment (so you’ll be financing the remaining 90%). This is the type of financing that all bad credit lenders offer. Because these are retail loans and not leases, bad credit auto loan shoppers should be looking at compact to mid-sized cars in order to keep the payments within their budgets.

The Bottom Line

For more information on bad credit car loans and budgets, visit our web site at www.autocreditexpress.com, you will find a number of loan calculators that will help you not only budget your loan, but give you an idea of how much your car payment will be.

At Auto Credit Express, we have helped thousands of customers with bad credit raise their credit scores and reestablish their car credit with bad credit car loans. We do this without making outrageous promises and by being up front about how we can help you. Our web site clearly states the minimum requirements for a car loan so you can see where you fit in. If you have questions that our web site can’t answer, there is a toll free number you can call that will give you a live operator (during normal business hours) who can help you.

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