The loan term is one of the most important factors to consider in a bad credit car loan.
The process of reestablishing your credit
Here at AutoNet Financial, we are in the business of helping our customers reestablish their credit by financing their vehicles with a bad credit auto loan through high risk lenders. As the borrower, one of the things you can do to aid in the process, and make it less expensive in the long run, is to adjust the term.
There is a reason that we’re suggesting this. Unlike a conventional auto loan, the real purpose of bad credit car financing is to raise your FICO score and reestablish your car credit. It’s really a means to an end. As such, now is not the time to buy your dream car. Instead, you should be considering a vehicle that is, firstly, affordable and, secondly, dependable.
Affordability is important because you’ll want to keep the loan term as short as possible (we’ll get into that in a minute) while dependability is also important because you don’t want this car breaking down during the time you’re financing it. After all, who wants to pay for a car that isn’t running? For now, though, we’re going to take a look at affordability and what you can do to save even more money on a high-interest subprime car loan.
Adjust the term
The easiest way to cut down on your bad credit car loan interest expense is to shorten the loan term. Although a shorter term will raise the monthly payment, it will also lower the total amount of interest paid on the loan. As an example, if you finance a car with a selling price of $15,000 plus tax (7%) and fees of $120 (non taxable), and the down payment is $2,000 the amount of the loan will end up to be $14,170.
If you finance this car for 60 months, your payment will be $337 per month (using a 15% interest rate factor – pretty average for a subprime car loan). The amount of interest that you will pay over the life of the loan is $6034. If you were to reduce the loan period to 48 months, the monthly payment would increase to $394, but the amount of interest would drop to $4742 – a decrease of almost $1300 when compared to the five year loan.
Reduce your chances of being “upside down”
There are additional benefits to shortening the loan term. Everyone knows that a car loses its value over time (beginning when you drive it off the lot). In fact, if you owe more on your car that it appraises for when you want to trade it in, you have what is known as negative equity (known in the car business as being “upside down” in the loan).
By shortening the loan term and paying more every month, you’ll reduce the negative equity problem in the early part of the loan. By opting for a 48 month - or even a 36 month - loan term, when you are ready to trade in your car in order to get a new car at a lower interest rate, in as little as two years, chances are you won’t be “upside down” and you may actually have trade equity in your car that can be used as an additional down payment on the new loan.
In other words, by financing for a shorter period of time, you have turned a negative (no equity or negative equity in your car) into a positive (no negative equity and possibly trade equity in your car).
The Bottom Line
As a bad credit car loan customer, you need to look at this type of loan as a stepping stone to credit repair. Finance an affordable, dependable vehicle for the shortest loan period that you can afford. Make your payments on time and use your bad credit car loan as a step in reestablishing your car credit and raising your credit score.
For more information on the bad credit auto loan process, please visit our web site at www.autonetfinancial.com.
