Except in some fairly special circumstances, owning reliable transportation of your own is as much a necessity as regular haircuts and shoes that fit. Usually, and almost always when you’re starting out in life, this means borrowing the larger part of a used car’s cost.
As you might have heard, though, banks only want to lend money to people who don’t need it. Even the best bad credit car loans come with some rigorous conditions attached, assuming that you can get approved for one in the first place.
Don’t get discouraged, though. There’s no reason for you to wait at bus stops while it rains, or try to load a week’s worth of shopping onto your bicycle. There are indeed some low interest auto loans for bad credit out there if you know where to look; this article is all about telling you how to do exactly this.
Table of Contents
- 1 How Do Car Loans Work? Are They any Different from Personal Loans?
- 2 What Is a Car Title Loan?
- 3 Best Places to Search for Poor Credit Auto Loans
- 4 How We Picked the Best Bad Credit Auto Loans
- 5 Understanding How Bad Credit Affects Your Car Loan
- 6 How a Higher Interest Rate Hits Your Wallet
- 7 How to Shop for Car Loans When You Have Bad Credit
- 8 What Is a Subprime Auto Loan?
- 9 Can I Qualify for a Private Party Auto Loan?
- 10 Know Your Options When It Comes to Looking for the Best Bad Credit Auto Loans
How Do Car Loans Work? Are They any Different from Personal Loans?
Just like the military loves to use the words “collateral damage”, bankers are always talking about “collateral”, hopefully without damaging anything. Collateral is simply an asset that backs up, or secures, a borrower’s commitment to paying back the money lent to him. A loan used to buy a car, boat or house will almost always use the property to be bought as collateral. A personal loan, by contrast, is often issued without any supporting asset but may be used for any purpose rather than buying only a specific building or vehicle.
This means that, in a sense, the borrower signs over ownership of that asset until the loan has been paid back. This may sound slightly scary, but most national banks and other lenders aren’t in the pawnshop business and use repossession or liens only as a last resort.
The main benefit of taking a short term loan supported by some kind of collateral is that it will typically cost you much less in the long term. Since common types of collateral have a stable value and a ready market, the lending party’s risk is greatly reduced, so they can cut their interest rates accordingly.
What Is a Car Title Loan?
If you already own a house or other property, you can use it to negotiate better terms when taking on debt, perhaps in the form of a second mortgage. You can do pretty much the same thing using your car, which is also a form of collateral lenders are willing to accept.
This is called a car title loan; a kind of short-term, high-interest credit with a repayment term that typically runs to 30 days or less. The amount that can be borrowed ranges from a few hundred dollars up to several thousand, usually amounting to something between a quarter and half of the vehicle’s resale value. These kinds of loans might be a good alternative to a personal loan in some cases, but they do have some significant disadvantages.
In the first place, you may lose the car if you can’t redeem the loan in full and on time. The lender is technically entitled to take possession of the vehicle and sell it when the loan period expires, even if the outstanding amount is much less than the worth of the vehicle. Anything over that sum is remitted to the borrower, but auto title loan companies are typically more interested in getting their money back quickly, even if this means selling what used to be your car at a discount. Alternatively, they may give you the choice of re-financing your loan at a higher interest rate, which often sucks people into a debt trap they can only escape by selling the car in any case.
To qualify for a car title loan, you also have to own the car outright without any outstanding balance on it. If your car should be stolen or damaged, the insurance settlement is supposed to make up any shortfall. For this reason, most companies that offer car title loans will insist that you take out comprehensive coverage. The lending company will also normally want to keep the second set of car keys, may install a GPS tracker on the vehicle or even store it on their lot until they get their money back.
All in all, taking out a personal loan is normally a much better way to scrape up some cash in a hurry. Auto title loan companies have a nasty tendency to pile various fees on top of the interest. These may or may not be explained clearly at the time the loan is made, while people in this industry are also in the habit of declaring their interest rate as a monthly figure – 20% might sound reasonable at first, but it actually translates into around 250% APR. This is way, way worse than typical new car loans for people with bad credit.
Best Places to Search for Poor Credit Auto Loans
The internet is a wonderful thing: it has pictures of cats doing funny things, and it also allows consumers to make better decisions by comparing payday loans and all the options available to them. If you are looking for auto financing, you should certainly speak to the bank where you keep your checking account. They may not be able to offer you the best deal, though, so looking at alternative lenders, some of those who are specifically set up to accommodate people with low credit scores or special circumstances can save you a great deal of money.
It may be that you spot a company you’ve done business with before on the list below. If so, they should be your first port of call. Financial services companies love to see returning customers, not only because this allows them to make more money but also because someone they’ve dealt with before is less of a risk. Your history with a particular lender might well mean more than your bare-bones credit rating.
PrimeTimeAdvance.com, like many similar websites, acts as an intermediary that connects prospective borrowers with the most suitable lending institutions. They don’t make loans themselves, instead referring clients to the credit packages best suited to their particular needs.
The company tries to provide a kind of one-stop-shop for short-term loans and aims to be the service provider of choice for their regular clients. To this end, they store all your personal information securely, so you can quickly log in at any time to see what financial products are currently available and what interest rates you qualify for at the present moment, even on your phone.
One of the features that make them stand out is their rapid turn-around time: it’s not uncommon for one of their consultants to get back to you with a list of qualified recommendations later the same day.
QuickCashOnline.me was one of the first websites to allow consumers to see how many choices there are out there when it comes to auto loans. They’ve kept up with innovation as other companies entered the industry and continue to offer one of the most reliable platforms when it comes to vehicle financing.
A completely digital interface makes this a good source for convenient, no-nonsense credit. They handle both secured and unsecured loans of various types, including small car loans for bad credit individuals. Although few loan originator companies declare their fees upfront, instead of rolling it into the total cost of the loan, QuickCashOnline is one of the cheapest services of its kind.
MidWeekPay.com is one of the best online services for expert advice and guidance, making them a strong choice when talking about low credit score car loans for larger amounts. Rather than taking an assembly-line, once-size-fits-all approach, they are willing to spend some time understanding the information you provide to them in order to set you up with the cheapest loans that align best with your particular needs.
Filling out their online form takes less than ten minutes, after which you’ll immediately be informed whether or not you meet their basic requirements. Following this, it will generally take between 24 and 48 hours for them to provide you with a list of vetted lending organizations and credit products recommended for you. This company boasts an extensive network of banks and other lending institutions and maintains a good working relationship with these partners.
CarsDirect makes it possible for nearly anyone to apply for a car loan (of course, simply meeting their very generous requirements to sign up doesn’t guarantee that they can actually help you). They specialize exclusively in vehicle financing and offer no other financial services.
Their website also includes a kind of auto marketplace that allows you to search for your dream ride by price, location, make and model. As such, they earn commission both on selling cars and organizing the financing for them. This may make them a good option for anyone considering a private party car loan with bad credit, though they work through dealerships for the most part.
Auto Credit Express, like CarsDirect, pride themselves on their catalog of car dealers and auto financiers which makes it possible for them to handle the whole process of buying a car, from selecting the one you like to signing the loan agreement. They require more information than low-credit individuals, including about your income and employment, than most similar websites.
Even people who have gone through bankruptcy or have no credit history whatsoever are welcome to apply. Their function is still, however, just to connect people who want to buy a car on credit to companies willing to lend to them; they don’t have any control over what interest rates you’ll be offered. If you’re in the market for a real clunker, this is a good place to start, as they are willing to consider loans for high-mileage vehicles.
Car.Loan.com is another loan originating service that has close ties with a large number of dealerships. These typically organize the actual car financing themselves, which allows them some leeway in considering factors other than a low credit score but usually results in somewhat higher interest rates.
If you really need to purchase a vehicle within a day or three, they can probably be of service. You can buy or lease a car through them, which is often a better option than taking out a low credit score car loan.
How We Picked the Best Bad Credit Auto Loans
There are many requirements a company that provides you with access to auto loans has to meet to gain our recommendation, but also a few things that can disqualify them immediately. Some shortcomings that made us drop a few services from our list include:
- Too many customer complaints, especially ones that have gone unresolved;
- Spammy or potentially misleading advertising;
- A non-transparent referral procedure, which may indicate that clients aren’t always shown the best deals available;
- Undisclosed fees;
- Unresponsive or unprofessional customer service.
Aside from these obvious no-no’s, we also paid attention to the value-adding aspects of various loan originating services. Quite a lot of this comes down to how they communicate with their clients, both individually and in terms of the information posted on their website. Although explaining the details of any particular financial product is usually the responsibility of the company actually offering the loan rather than the one that steers you towards them, taking out a low interest car loan is an important decision. You shouldn’t be left with any unanswered questions by the time you sign the contract.
What impressed us particularly is the willingness of some of the online services we’ve selected to actually turn away business. All too often, consultants in the financial services sector are more concerned with their commissions than their clients’ welfare. This is not technically fraud, but it does leave a major stain on the industry’s reputation. You can, on the other hand, trust a consultant who points out other options available to someone in your situation, or who recommends that you hold off on borrowing until you’ve taken a few steps towards repairing your credit rating.
Understanding How Bad Credit Affects Your Car Loan
When a bank manager sees someone with stellar credit saunter into their branch, they roll out the red carpet; if they spot someone with a few black marks against their score, they hide the silverware. This isn’t really a question of discrimination or them trying to victimize some of their customers; it’s just part of the reality of any bank being a business that aims to make a profit.
The principle at play here is exactly the same as the one you would use when deciding whether or not to lend money to a friend: people who’ve been unreliable in the past will generally be unreliable in the future, too. Unlike between friends, however, your credit score is calculated by a computerized algorithm that can’t distinguish between someone being irresponsible or just having a run of bad luck.
Interest rates are pretty good right now. Unfortunately, people with poor credit normally pay much more than the average. As a rough estimate, people with a little credit history or a record of missed payments can think in terms of being charged 10% more than the average rate. (Most car loans, especially for large amounts, are granted to people with a credit score of “prime” or better, which brings down the average rate).
This is because a lender’s biggest worry is that they won’t be repaid on time or perhaps ever. The easiest way for them to mitigate this risk is to raise interest rates for everyone who is statistically more likely to default – in effect, the people who do make their payments subsidize those who don’t. Depending on how much you borrow and over what time period you agree to pay it back, the consequences of having to accept a higher interest rate can be serious:
How a Higher Interest Rate Hits Your Wallet
Interest rates are slightly lower on loans with a shorter repayment period or when buying a new vehicle. Again, this is a reflection of the lender’s risk: new cars’ resale values are easier to predict, while there’s less chance of a borrower encountering financial troubles over a short time. People in regions with an economy in decline also have to pay more, which is why online lending solutions ask for your zip code.
How to Shop for Car Loans When You Have Bad Credit
Buying a car is likely to be much more expensive than it has to be if you’re in a rush. If at all possible, take your time, do your homework and use the free tools mentioned above as often as you need to. Don’t get discouraged even if you feel like you’ve hit a brick wall ten times – you might just get lucky on the eleventh try. Also, don’t simply resign yourself to an astronomical interest rate just because your credit score is under 500 (find out yours here; you can make use of this service for free once per year).
One reason for this is that there are small differences in your credit score at different lenders and even among the three main credit bureaus. While this won’t be enough to completely alter your risk profile in a bank’s eyes, this variation might be enough to nudge you into a different category. Different lenders also have their own rules on how credit scores are classified. Your credit might, for instance, be “subprime” at one financial company but count as the more favorable “nonprime” at another, giving you access to a more competitive interest rate.
Individual lenders’ interest rate policies also differ depending on the type of credit sought – auto loans vs. mortgages, for instance – meaning that you might receive a decent interest rate when buying a car even if you don’t qualify for an unsecured loan. Your credit rating also rises and falls from month to month as factors like your total outstanding debt and available credit vary. Banks’ appetites for specific kinds of borrowers actually change on a fairly frequent basis, too. A company that’s reluctant to work with you in April might well give you a good deal in December when car sales are slow.
Asking for several quotations is normally free and a necessary step when looking for the best deal on vehicle financing. Actually applying for a loan, however, causes the lending institution to run a “hard” credit check, which indicates to credit bureaus that you’re about to go into debt. This will affect your credit score to some extent. The good news is that any number of applications within the same 14-day period are counted as a single one for credit rating purposes, so you have two weeks to approach as many potential lenders as you want.
For the most part, however, your credit score is determined by your financial history over the last several years and can’t be changed in a hurry. What you can do right now is offer as large a down payment as you can afford. This indicates that you’re not desperate, but instead making a deliberate and calculated decision to buy a car. Lending officers take notice of such things and, more often than not, be willing to adjust their financial risk assessment and your interest rate accordingly.
You should also avoid falling into the trap of thinking that the number at the bottom of your credit report is all that matters. Financial institutions that specialize in low interest auto loans for bad credit, in particular, are always willing to look at other indications that you’ll be able to pay them back on time. If you’ve been employed at the same company for the last 10 years or the car you have your eye on has passed a CPO inspection, make sure they know this.
Don’t bother with dealerships that insist you use their own in-house financing; they rarely offer competitive terms. Some of them also like to pull tricks like allowing you to drive away in “your” new car while final approval for your loan is still pending. Surprise, surprise: this is often refused, meaning that you can keep the car you’ve already grown somewhat used to only by accepting a higher interest rate.
What Is a Subprime Auto Loan?
Bankrate recommends having a credit score of at least 719 if buying a new car, or 655 for some pre-owned wheels. This will normally be enough to put you in the bracket that qualifies for the lowest interest rates.
About a fifth of all car loans are classified as “subprime”, meaning that they’re issued at a high rate of interest to people with very poor credit. These are offered by many respectable companies, but also car dealerships and operations not known for any special commitment to integrity. Apart from being burdened with a massive interest rate, these agreements are often written to be very stringent and completely in favor of the lender. Some of these will quite happily repossess a car at the drop of a hat, not only leaving you without transportation but dragging your credit score down even further.
Subprime car loans are typically taken out by people who are already in financial distress but assume that, in terms of money at least, everything is going to come up roses for them during the foreseeable future. This kind of wishful thinking really has no part to play in financial planning. The lenders don’t care whether any one client goes under the high interest rates they charge and vehicle repossessions make up for what they lose through defaults, even though there are signs that their lending practices are leading to a credit bubble.
If your credit score is below about 600, depending on who you apply, you will probably find it difficult to qualify for anything other than a subprime loan. Taking on one of these is almost always a mistake. If the advice given in this article isn’t enough to help you avoid this trap and you really need a car in a hurry, see if you can’t find a very cheap one that at least runs, or try to get someone with a better credit rating to co-sign the loan with you. The latter more or less guarantees you better terms, but be warned: more than one relationship has been ruined in this way.
It’s entirely possible to refinance an auto loan once your credit has improved. If this option is available to you, you should certainly look into the possibility, but don’t simply assume that you’ll be able to negotiate a more favorable interest rate at some point in the future.
Can I Qualify for a Private Party Auto Loan?
Most people, when looking for their next used car, will take a tour of their local dealerships or browse for deals on major auto-trading websites. This isn’t the only way, though: assuming that you know at least a little bit about cars and are willing to do the legwork, looking through classified ads and contacting private sellers may yield good bargains.
Businesses that sell pre-owned cars typically buy them for about 30% less than the price displayed on their lot, which represents an immediate saving you’ll get if you choose to buy privately. Dealerships do, on the other hand, take the time to inspect their stock and repair whatever needs to be (or, in some cases, merely say they do). Buying from a private seller, therefore, increases the chances of unwittingly buying an oil-guzzling, gear-grinding lemon of a car with little to no legal recourse if it breaks down in some expensive way.
This implies that private party car loans, though similar to other kinds in that the vehicle serves as collateral, have some particular requirements. Specifically, most lenders will not consider financing a privately-sold car over a certain age or with too many miles on it. Applying for a private party auto loan is also more complicated and takes longer before approval.
It’s certainly possible for a person with bad credit to save a little money fast by going the private route. As always, though, draw up a little spreadsheet and run the numbers, and don’t forget to allocate a little extra cash for maintenance.
Know Your Options When It Comes to Looking for the Best Bad Credit Auto Loans
One of the best pieces of financial advice you’ll find here on Pro Money Savings or anywhere else is simply this: shop around! The first deal you’re offered will rarely be the only or best one available to you, and asking for generic quotations at various loan providers don’t harm your credit score in any way.
Some lending organizations won’t touch anyone with poor credit, others exploit them by charging them punitive interest rates. There are, however, companies that specialize in helping them. All you may need to do is reach out and see what’s available to you at this point in time.
If your credit score is poor, you can save a tidy sum by postponing your car purchase for six months or a year and devote that time to saving and rebuilding your credit profile. Unfortunately, this is not always possible. But even if you need auto financing quickly, you’re not totally at the mercy of your credit score, especially if you choose your loan plan just as carefully as the car itself.