Consumer Car Buying Advice Blog

Low interest rate car loans and bad credit auto loans never go hand in hand but knowing what type of loan you are signing up for can save you a lot of money particularly if you are financing your vehicle with auto loans for bad credit.

Before you sign up

Our business here at Auto Credit Express is to match up our applicants, who have filled out our bad credit auto loan application, with dealers in our nationwide network that can help them get them financed. By doing this, they can not only reestablish their car credit, they can also raise their credit scores.

Our web site also provides many of the tools needed in order to make an informed decision on how to approach the credit auto repair process, since a poor decision could result in some negative consequences – even getting trapped in an unaffordable which could end up lowering their FICO scores even further.

The worst result would be repossession. If this happens, the only remaining choice for most buyers is a tote the note car dealer. It also means that auto credit repair has to be put on hold for at least a year, since most lenders that offer car loans with bad credit will only consider applicants with a repossession that’s more than a year old.

One of the keys to a successful bad credit car loan is an understanding of the basics. And today that means, whether you are getting a bad credit car loan or a conventional car loan, you need to be aware of the two basic types of car loans offered by lenders.

Simple interest loan

The simple interest loan is, by far, the most common type of car loan. With a simple interest loan, you are charged interest each day on the balance that you owe. This means that if you make your monthly payment early (for example, on the 2nd of the month instead of the 15th, when it is due), you will end up paying less interest over the life of the loan, since the daily interest charge (based on the balance), per month, will be lower.

In addition, if you decide to pay the loan off early, your interest payments, as well as the overall interest expenses, stop at that time the loan is repaid. The payoff price at that time would include the original price of the car plus the total of the daily interest charges to date, minus the payments you have made. In other words, there is no penalty if you pay your car off early.

Rule of 78′s (pre-computed) loan

The rule of 78 method is not used nearly as much as it used to be and for good reason. With modern disclosure laws as they apply to finance contracts, most people would not sign on the dotted line if the interest expenses on the loan were computed using this method.

With this type of loan, the interest is computed using amortization tables. This determines the amount of interest charged over the period of the loan and includes an amortized portion of the interest with each payment. Typically, this means that you will pay ¾ of the interest charges in the first ½ of the loan term. If you pay the loan off early, the lender will “rebate” part of the interest, but you’ll still end up paying more interest than if it were a simple interest loan.

Look at the contract

In 1992, Congress outlawed the use of “rule of 78′s” for all closed-end (fixed final payment date) loans over 61 months in length. The following states also outlawed these “rule of 78′s” loans for loans 60 months and less: Arizona, Delaware, Idaho, Iowa, Kansas, Maine, Maryland, Massachusetts, Michigan, Minnesota, Nebraska, Nevada, New Hampshire, New York, Oregon, South Dakota and Vermont.

If you live in any one of the other states, be aware that most conventional lenders will still offer only simple interest loans. However, some subprime lenders as well as many buy here pay here and tote the note car lots still use the “rule of 78′s” to compute the interest on their bad credit car loans.

To avoid signing up for a rule of 78′s loan, be sure to read your finance contract thoroughly. If it has the words “refund” or “rebate of interest” or if the wording in the “prepayment” portion states anything other than “no penalty”, it is not a simple interest contract and you should stay away from this type of loan if at all possible.

As we see it

Here at Auto Credit Express, we specialize in placing customers with bad credit with dealers that can help them get financed. These affiliate dealers are knowledgeable and will treat you with the same degree of respect that they treat every customer that walks through their doors. If you have any questions that our web site can’t answer, feel free to call us at the toll free number listed there.

So if you are serious about getting your credit back on track, why not begin a new chapter in your life by filling out our bad credit car loan application now.

Tags: auto credit, Bad Credit, buy here pay here, car credit, credit, credit auto, Credit Repair, credit score, fico, FICO score, interest rate, repossession, rule of 78, simple interest, tote the note

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