The interest rate on your car loan can make a big difference in what you end up paying. If you're taking out a bad credit auto loan, you can reduce the costs with the right plan. If handled properly, you can use your subprime car loan to improve your credit score so you can refinance your loan or trade in your vehicle in a few years.

How Interest Rates Affects Overall Cost

car dealership deskThe interest rate you qualify for on an auto loan is largely set by your credit score, and how much you pay in interest charges greatly influences the overall cost of your loan. Even a small improvement in your credit score can help you save money in the long run.

Let's use a real-world example to better understand how interest affects how much you pay for your car:

According to Experian, the average used car loan amount in the second quarter of 2017 was $19,189 and the average loan length was 63.98 months. Now, let's compare the difference between a loan with a seven percent interest rate and another with a 14 percent rate using these figures. To make things easier, our example uses a $19,000 loan with a 60-month (five-year) term.

$19,000 car loan, 60 month term, 7% interest rate:

  • Monthly Payment: $376.22
  • Total Interest Paid: $3,573.41
  • Total Cost: $22,573.41

$19,000 car loan, 60 month term, 14% interest rate:

  • Monthly Payment: $442.10
  • Total Interest Paid: $7,525.70
  • Total Cost: $26,525.70

The person who takes out the loan with the 14 percent interest rate winds up with a monthly payment that's $65.88 higher and a total loan cost that's nearly $4,000 more. That's a sizeable difference between someone with fair credit getting a seven percent rate compared to someone with poor credit who qualifies for a 14 percent interest rate.

Approaching a Bad Credit Car Loan

When you need to finance a vehicle with less than perfect credit, you'll likely only qualify for a higher than average interest rate. However, an auto loan is one of the best credit builders around.

Approach the process like this: the loan is a short-term transportation fix for a long-term credit solution. With two or three years of positive loan payments, you can improve your credit score in a meaningful way. After improving your credit, it may be possible for you to refinance your loan and qualify for a better interest rate. Or, you can even trade in your vehicle and take out another loan again, with a lower interest rate.

Keep in mind that you can't have negative equity in order to qualify for a refinance. Being upside down also complicates things if you're trying to trade in your car. You can set yourself up for success down the line with the right approach going into the loan.

Here are some tips to accomplish that:

  • Finance an affordable car.
  • Make a down payment.
  • Keep the loan term as short as possible.
  • Make all of your payments on time.

These tips will help you build equity in your car, giving you more flexibility when it comes time to refinance or trade in down the road.

Helping You Find Financing

Borrowers with bad credit can reduce the total cost of financing by using their loan to improve their credit and trading in or refinancing their vehicle down the road. When you're ready to refinance a car loan, fill out the secure refinance request form on our website to get started.

If you're dealing with credit issues and need a car, Auto Credit Express is teamed up with a nationwide network of special finance dealerships. We want to connect you with a local dealership that knows how to handle challenging credit situations. You can get started right now by filling out our auto loan request form.