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Good News About Bad Credit Car Loans

American Government Special Collections Reference Desk

Good News About Bad Credit Car Loans

Mike Hamel
June 13, 2006

Almost half of all car purchases in America are financed. Couple this with that fact that 30 million Americans have credit problems and you see why there’s such an interest in bad credit car loans.

While carrying higher interest rates than prime loans, bad credit car loans are not hard to get. Even people who have filed for bankruptcy can find a decent deal on auto financing if they shop around. It doesn’t matter if they buy new or used.

Bad Credit Car Loans - Buying New

For peace of mind, safety and hassle-free driving, there’s nothing like buying a new car. When you buy new, you have more control over optional features than if you buy a pre-owned vehicle. You will also get a new warranty that lasts much longer than the extended warranty you can buy for used cars.

The danger in buying new is getting “upside down” on the bad credit car loan. One way to avoid this is to have a decent down payment—20% or better. Another way is to choose a vehicle with high resale value. This will help slow down depreciation.

Depreciation is the difference between the Manufacturer’s Suggested Retail Price (MSRP) when you bought the vehicle and what it’s now worth. A $25,000 car will depreciate an average of 15% the first year and between 7% and 10% annually for the next two years. Cars with a prestigious nameplate hold their value longer and are less likely to depreciate faster than the car loan.

Bad Credit Car Loans - Buying Used

Buying a used vehicle makes sense if you want to keep your monthly payments affordable. Since used cars depreciate slower than new cars, they make better short-term collateral for lenders. However, some lenders will decrease the loan’s term and increase the rate on bad credit car loans.

When you buy used, you have the chance to get a more expensive model than you could afford if you bought it new. For about the same amount, you could own a new Hyundai, a two-year-old Taurus, or a six-year-old BMW.

Getting a used vehicle from a private party will be cheaper than buying the same car from a dealership. Here are a few questions you’ll want to ask the seller:

- How long have you owned the vehicle? - Has the vehicle been in an accident or repainted? - When are the next state inspection and emissions tests due? - How often has the oil and filter been changed? - Why are you selling the vehicle?

First Things First

With the ease of the online application process at sites like Buy A Auto, you can pre-qualify for a bad credit car loan before you start shopping for a vehicle. Make sure to borrow enough money to cover all the costs associated with the purchase such as dealer prep charges, if you are buying new, license plates, title and registration fees, etc.

Remember that total price is more important than the monthly payment. Stretching the length of a bad credit car loan will mean paying more interest. For instance, the payments on a $20,000 loan can be lowered from $500 a month to $360 by extending the term from 48 months to 72 months. However, this will cost about $2,000 more over the life of the loan, or 10 percent of the loan amount.

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