If you know anything about auto financing, you should know that the longer your loan term, the more money you’ll end up paying. The numbers can be deceiving, because the longer you stretch a loan, the lower your monthly payments. A low monthly payment may sound great, but it’s not always the best option – especially if you have bad credit.
Opt for Lower Overall Cost
What you need to realize about auto loans is that every day, interest is added to the loan balance. So, the longer it takes to pay the loan off, the more interest you’ll pay. This can be especially costly if you’re a bad credit car buyer, because subprime auto loans carry higher interest rates. The higher your interest rate, the more costly your interest charges will be.
Since it’s difficult to qualify for lower interest rates when you have poor credit, you have to find other ways to keep your interest charges low. The easiest way to do this is to pay the highest monthly payment you can afford for the shortest time possible.
Let’s break this down by the numbers so it’s easy to see the savings:
- Example A: A $20,000 loan, at 10 percent interest, for 72 months, with $1,000 down will cost you approximately $26,400 by the end of your loan term. In this example, you’re paying $352 a month for six years. At the end of your loan you’ve paid a total of $6,343 in interest charges.
- Example B: The same loan for a shorter term, say 48 months, will save you over $2,000 in interest charges. In this example, your monthly payments are higher, nearly $482 a month, but you’re only making payments for four years. This cuts your interest charges to approximately $4,130 dollars and total payments to $23,130.
Keep in mind that taxes and title and license fees aren't included in the price of the loan, so you’ll have to be prepared to pay those costs up front. Also, placing a larger down payment will further reduce the overall cost of your loan.
Additional Ways to Save
In the examples above we chose $1,000 down because subprime lenders typically require a minimum down payment of that amount, or 10 percent of the vehicle's selling price, whichever is less. It’s often recommended that, if you’re able, you put down 20 percent to help offset costs and depreciation. The larger the down payment, the less you have to borrow, which, in turn, lowers the interest charges over the loan term.
With example B above, if you were to use a down payment of $4,000 (20 percent), you could save yourself an additional $652 in interest charges over the 48-month loan term.
Why Shorter Loan Terms are Important for Bad Credit
Not only will you save yourself money by keeping a loan term short, but you’ll have a better chance of completing your loan before something goes wrong, or your car loses too much of its value. The most common loan term is 60 months – that’s five years. A lot can happen in five years, including mechanical failure or body damage. The chances of these types of issues increase as a vehicle ages, so stretching a loan to 72, 84, or even 96 months could leave you paying on a vehicle that’s no longer drivable.
Another reason to opt for a short term is that paying off a car loan is a great way to improve your credit, as is making all your monthly payments on time and in full. Your credit should improve once you complete the loan, which happens more quickly with a shorter term loan. This allows you to look for a loan with better rates sooner.
Start Your Loan Process Today!
When it comes to getting a loan with bad credit, you’ll want a lender that can work with challenging credit situations, and not all of them can. Those that do only work indirectly through special finance dealerships, and not all dealers advertise whether or not they have these lenders available. This can make it tough to know where to turn when you’re struggling to get a car loan.
Here at Auto Credit Express, we know how difficult it can be to go from dealer to dealer only to be disappointed. That’s why we’ve taken the stress out of the search by working with a nationwide network of special finance dealers that have the lending resources you need. Let us help you find a local dealer. Simply fill out our no-obligation, cost-free online auto loan request form and to start the process today!