A payment shopper is someone who's only concerned with how much they're spending on a monthly payment – often striving to pay the lowest possible amount each month. This may sound great in theory, but shopping for a car loan this way could end up costing you in the long haul.
It Doesn't Pay to Be a Payment Shopper
When you're only concerned with getting the lowest possible monthly payment on an auto loan, you typically end up stretching your loan out for longer than necessary. Stretching your loan term too far could mean paying more for a vehicle than it's worth.
This is because the longer you have to pay for a loan, the more that interest charges you accrue. Once interest starts to stack up it can add thousands of dollars to the overall cost of your car loan – especially if you're a borrower with bad credit. Bad credit consumers typically qualify for higher than average interest rates on auto loans.
Overall Costs in Real World Terms
According to Experian’s State of the Automotive Finance Market from the third quarter of 2020, borrowers in the non-prime, subprime, and deep subprime credit score ranges generally qualify for interest rates between around 10% to 20.5%. These borrowers typically have a credit score of 660 or below. At Auto Credit Express, our dealer network data shows an average interest rate of around 13%.
Most loan terms for new and used car consumers, regardless of credit score, are hovering around 72 months on average according to Experian. Shoppers within our dealer network typically qualify for an average loan term of 66 months. Either way, this all adds up to a recipe for large amounts of accrued interest charges.
For example: The vehicle you're financing has a sticker price of $24,000. You qualify for an auto loan with a 13% interest rate, for 60 months, and make a $2,500 down payment. In this situation, you would end up paying over $7,000 in interest charges by the end of the loan. This works out to a payment of around $490 every month, and a total loan amount of over $29,000.
Now let's say that you really want this $24k vehicle, but $490 dollars a month doesn't quite fit into your budget. A payment shopper might ask the lender about financing for a longer loan term to drop the monthly payment amount. Let's imagine our borrower opts for an 84-month loan term.
Changing nothing but the loan term, the new monthly payment is nearly $100 less, around $392. However, the new total loan amount comes in at almost $33,000. That's over $11,000 in interest charges.
Saving Money on Interest Charges
Being a payment shopper means paying the least amount you can each month, often for the longest time possible. But because interest charges can add up fast on an auto loan, it's a better idea to look at the big picture and create a balance between monthly payment and loan term.
There are several ways you can cut down on the amount of interest charges you pay and on the overall cost of your auto loan:
- Use the largest down payment you can. When you're a bad credit borrower you're usually required to make an auto loan down payment of at least $1,000 or 10% of a vehicle's selling price. The larger the amount, the more you save in interest because a down payment is applied directly to the selling price of the car. Using the example above, the amount being financed is actually $21,500 after the down payment comes off the sticker price. If you took the same loan without making a down payment the loan would be over $32,000 for 60 months and over $36,000 for an 84-month loan term.
- Take on an auto loan with the highest monthly payment you can comfortably afford with the shortest term possible. This helps you to balance overall costs and pay off your loan more quickly, accruing the least amount of interest possible. Looking at the big picture and having your car-buying budget prepared ahead of time can really help with this.
- Pay ahead on your car loan whenever possible. The key to saving money in interest charges is to knock down your principal loan balance quickly. Most auto loans these days are simple interest loans, which means that every day a small amount of interest accrues based on the balance of your loan. Chipping away at this amount even by putting an extra $20 toward each monthly payment can help you save money in the long run.
- Work on building your credit score. Even though lenders that work with bad credit borrowers know that you're more than a credit score, the easiest way to qualify for a lower interest rate is to improve your credit as much as possible. Simple things like paying all your bills on time and making sure that your credit reports are free of errors, taking on new lines of credit, or lowering your credit card balances can all make a difference.
If you can't get your credit score improved before it's time to look for your next auto loan, don't despair! An auto loan from a subprime lender is a wonderful way to start your credit-building journey. Affordable options like well cared for used vehicles and certified pre-owned (CPO) cars aren't out of reach when your credit is less than perfect.
Finding a Subprime Lender
Not all lenders work with borrowers that have credit challenges. But subprime lenders look at more than just your credit score to get you approved for auto financing. Using qualifications such as income, work history, residence stability, and your willingness to make a down payment, bad credit auto lenders take a big picture approach to getting you the car loan you need.
These third-party lenders work through special finance dealerships, but they don't always shout from the rooftops about their ability to handle customers with tarnished credit. If you're not sure where to turn for your next auto loan, let us help. At Auto Credit Express we know how important it is to go into an auto loan situation prepared, so you don't have to be a payment shopper!
Let us point you toward the auto loan you're looking for. Simply fill out our fast, free car loan request form and we'll get to work matching you with a local special financing dealer. We've been connecting consumers with the bad credit lending opportunities they've needed for over 20 years, now it's your turn! Get started with our no-obligation process today!