Long Term Financing with Bad Creditby Steve Cypher on Friday, January 4th, 2013
With the higher interest rates charged to car buyers with credit problems it hardly makes sense to stretch out loan payments for the longest term possible.
At Auto Credit Express we know this is the case because we’ve spent more than twenty years helping credit-challenged car buyers find dealers that can give them their best opportunities for approved auto loans.
High risk auto loans
Since poor credit car loans, by their very nature, pose higher risks to lenders. According to recent data from Experian, vehicles financed with high risk car loans are roughly twice as likely to get repossessed. With this in mind we thought we’d share a couple of lessons we’ve learned over the years about how to reduce auto loan interest charges.
Buyers with car credit problems typically can’t shop around to compare interest rates simply because the majority of bad credit lenders only do business indirectly through franchised new car dealers. But regardless of the assigned interest rate, there are at least three things that can be done to reduce the interest charges you’ll pay.
Reducing the loan term
The first thing you can do is reduce the term of the loan. While doing this will increase your monthly car payment, it can dramatically reduce the interest expenses charged by the lender.
Here is just one example:
Financing a $15,000 car in a state with a 7% tax rate and non-taxable fees of $120 with a down payment of $2,000 brings the total amount to finance to $15,240.
Financing that amount for 60 months at an interest rate of 17% means the payment should come in at around $379 per month. In this case the total interest paid over the loan term works out to be $7,485 – provided every payment is made on time.
If the loan term is reduced by 12 months to 48 months, the monthly payment rises to $439. That may seem like a lot, but think of it in these terms – it’s just $2 more per day, about the cost of a cup of coffee.
But here’s the good news: the total interest expense drops to $5868 – a decrease of over $1600. This works out to almost $34 per month, or just over $1 per day. Other benefits include reducing the time your vehicle is worth less than the payoff amount – which also means you can trade out of it earlier (when your credit scores should higher to qualify for a lower interest rate).
Other savings tips
Loan pre payment
Pre-paying the loan will give you the same results. It works something like this: if you think you might not be able to afford the higher payment of a shorter term but realize you can any time after you’ve signed on the dotted line, all you have to do is make the higher loan payment each month and, because it’s a simple interest loan, the results will be the same.
If you can’t afford the higher payment or you want to reduce interest expenses even further, split either the 60 month or 48 month loan payment in two – making half the payment early and the balance on the due date. Because loan interest is computed on a daily basis, this will result in even more savings.
The Bottom Line
When financing a car – especially one in which the loan carries a higher than normal interest rate, long term financing only adds to the already high finance charges. Instead, consider either financing it for the shortest term possible.
If you’re worried about making those payments, than consider either pre paying the loan or splitting the loan payments. Either one (or both) will save you money on interest expenses. By following these suggestions and making timely loan payments, you should be able to trade out sooner while reestablishing your auto credit more quickly.
One more thing that’s good to know: Auto Credit Express matches consumers with poor credit with those car dealers that can arrange for auto loan approvals.
So when you’re ready to reestablish your car credit, you can begin the process by filling out our online car loans application.