Lower Interest Bad Credit Car Loansby Steve Cypher on Wednesday, February 9th, 2011
Reduced interest rates and bad credit auto loans are usually not one in the same but avoiding one type of loan can save you a lot of money in interest expenses
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If you’ve been approved for financing with auto loans for bad credit, you’ll want to know the differences between the two types of loan interest. We know because at Auto Credit Express we’ve worked with credit-challenged retail car buyers for the last two decades.
Our commitment to credit-challenged car buyers extends to a web site featuring a bad credit auto loan application – something we realized was needed after seeing the frustration and discouragement which customers with poor credit experience at dealerships that don’t offer second chance auto loans.
And while these buyers can always visit their local tote the note dealer, this won’t solve their car credit issues since these dealers usually don’t report loans or loan payments to the credit bureaus and this type of loan usually involves a greater possibility of repossession.
Bad credit buyers should also be aware of the two basic types of car loans offered by lenders.
The simple interest loan
The simple interest loan is the most common type of car loan. With this loan, you are charged interest each day on the outstanding loan balance. As such, if you make a monthly payment early (say, on the 2nd instead of when it is due on the 15th), you’ll end up paying less interest over the life of the loan, since the daily balance (what the interest is based on) will be lower.
Also, 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. This is because the overall interest accrual stops when the loans balance is paid. To put it simply (no pun intended), there is no penalty if you pay your car off early.
Rule of 78′s (pre-computed) loan
The rule of 78′s method is not used nearly as much as it used to be and for good reason. With modern loan contract disclosure laws, 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 a portion of the interest with each payment. Typically, this means that you’ll 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.
Check 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 loans for 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 other state, 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 accepting 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’s not a simple interest contract so you should stay away from this type of loan if possible.
The Bottom Line
A rule of 78 loan can make a bad credit car loan even more expensive. Before accepting one, check to see if you qualify for a simple interest loan.
At Auto Credit Express, we specialize in placing customers with bad credit with dealers that can help them. These dealers are knowledgeable and work with a broad spectrum of lenders to ensure you have your best chance of getting approved for a car loan.
So if you are serious about getting your car credit back on track you can begin by filling out our bad credit car loan application now.