Auto Loan Interest Rates for People with Bad Credit & Usury Laws

Auto Loan Interest Rates for People with Bad Credit & Usury Laws

Many states have laws limiting the interest rates that lenders can charge people. These laws were enacted with the intent of protecting consumers from rate gouging lenders. It seems like a good idea, but the fact is that states with low interest rate caps hinder people with bad credit and the credit rebuilding process.

When I first started helping people with bad credit finance cars back in 1996, Michigan had strict Usury laws. Auto loan interest rates were capped at s16.5%, 19%, and 22%, depending on the year of the vehicle. Back then only a handful of sub prime lenders did business in Michigan. The ones that did would not approve people with really bad credit and when someone had marginal credit they would often pay the maximum rates listed above.

Lenders did this to balance the risk of their lending portfolios. In other words, if there were no interest rate caps, one customer's credit may warrant a 25% rate, while another's might warrant a 17% rate. Since the lender is capped at 22% by the state, they end up charging both customers 22%. Additionally, since there were few lenders, and the rates were capped, people with really bad credit often had to settle for a high mileage, unreliable, used car from an un-reputable car lot with in-house financing. Each week these consumers had to drive to the dealer to make a weekly payment.

When Michigan changed the law to allow rates on all model years up to 25% a few things happened. More lenders came to Michigan. More lenders meant more competition. More competition meant lower rates for many people with credit problems. Higher usury rates also allowed people with really bad credit the opportunity to get a car loan with a reputable auto finance company that reported to all three credit reporting agencies, instead of that unreputable able car lot that did not report to the agencies.

After the law changed it was also easier to get people with bad credit approved on a brand new car; before the law changed new car rates were capped at 16.5% and few sub prime lenders would finance brand new cars. Getting an auto loan from a national finance company that reports to all three bureaus is extremely important if you are trying to improve your credit rating.

If you settle for a loan from an un-reputable dealer that does not report to the credit reporting agencies, not only will you be limited to an old, high mileage car, you will not improve your credit rating by making all of your payments on time. Often these car lots only report when you do not pay on time.

Today, many states, such as Nebraska and Rhode Island, still have strict usury laws in place. In these states it is much harder to get people with bad credit a loan from a national finance company. When people in these states are approved, they are often approved at the state rate cap, which, if I recall is 18 percent. Other states, for example Texas, regulate the rate based on the model year. People in Texas with bad credit can get a loan from a national finance company, but they may be limited to an older model year with a higher rate.

It's my belief that states with higher usury rates actually benefit consumers, through the competition of more lenders, and the ability to get people with really bad credit approved for an auto loan through a national auto finance company.
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