Car buyers that have experienced problem credit need to carefully consider the length of this type of a car loan for a number of reasons
With the higher interest rates that lenders charge consumers with bad credit, it doesn’t make a lot of sense to stretch the payments out for the longest term possible.
Here at Auto Credit Express we know this is true because we’ve spent the past two decades helping consumers with questionable credit searching for online auto loans find those new car dealers that can offer them their best chances for auto loan approvals.
Subprime car loans
High-risk car loans, by their very nature, expose lenders to higher liabilities. According to recent data from Experian, subprime auto loans are roughly twice as likely to end in repossession. With this in mind we thought we’d pass on a couple of things we’ve learned about poor credit car loans during the past two decades.
Car buyers with credit problems typically can’t shop around to compare interest rates simply because the majority of subprime lenders only loan indirectly through franchised new car dealers. But regardless of the assigned rate, there are strategies that can be employed to reduce the overall interest paid.
Reduce the loan term
The first thing that can be done is to reduce the term of the loan. While doing this will increase the monthly car payment, it can dramatically reduce the interest expenses paid to 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 the vehicle is worth less than the payoff amount – which also means it can be traded in earlier (about the time credit scores improve to the point where most borrowers will qualify for a lower interest rate car loan).
Loan pre payment
Pre-paying the loan will show the same results. It works something like this: for borrowers that believe they might not be able to afford the larger payment that results from a shorter term but later realize they can after signing the loan agreement, all that has to be done is to make the higher payment each month and, because it’s a simple interest loan, the results will be the same.
For consumers that either can’t afford the higher payment or you wish to reduce interest expenses even further, the answer is splitting the loan payment in two by making half the payment early and the balance on the due date. Because simple interest loan charges are computed on the daily balance, this will also reduce the amount of interest paid.
As we see it
When financing a vehicle – especially when the loan comes with a higher interest rate – stretching the term adds to the already high finance charges. As an alternative, consider financing a more affordable vehicle for the shortest term possible – remember this is not the time for anyone to buy their dream vehicle.
To reduce interest expenses even further, consider either pre paying the loan or splitting the loan payments. Either one (or both) will save money on interest expenses.
By following these suggestions and making timely loan payments, borrowers should be able to trade out sooner while reestablishing your auto credit more quickly.
One more tip: Auto Credit Express matches people with car credit difficulties to those new car dealers that can offer them their best chances for approved auto loans.
So if you’re ready to reestablish your credit, you can begin now by filling out our online auto loan application.
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