A recent blog article listed three dangers of subprime auto loans. Here we explain how to avoid all three.
In our experience
At AutoNet Financial, we are in the business of helping our customers reestablish their credit by filling out a credit application and financing either a new or a newer pre-owned vehicle with a bad credit car loan through high risk lenders. In the process, we have helped many of our customers raise their credit scores and reestablish their car credit by financing a vehicle with a bad credit auto loan. We also do our best to educate these consumers on the bad credit car loan process as well as the different types of lenders that are involved with these types of transactions.
One of the things that we’ve learned through the years is that the key to a successful bad credit auto loan is focusing on the basics. This means that in order to rebuild their credit, bad credit car loan customer need to understand how the subprime auto loan process works, which includes understanding some points covered in an article that we recently came across that discussed 3 dangers of subprime auto loans.
Statements and answers
Article introduction:
“Many people are forced to use subprime auto loans as a means to buy a car because of their poor credit history. The subprime lending market is there for those that have made some financial mistakes and have blemishes on their credit report. While it can be beneficial to some, it is also known for causing its fair share of problems. Getting involved with a subprime auto lender could compound your financial problems if you are not careful.”
What we have to say:
We have to agree with the gist of everything that was said in this opening statement. But at the same time, we should also note that getting involved with any kind of lender could compound your financial problems if you don’t pay back the loan as agreed.
Article issue of financial distress
“One of the worst things about subprime auto loans is that they are always going to have a higher interest rate than other types of loans. When you are paying a substantially higher rate of interest than everyone else, this means that your payment is going to be higher in most cases. When you are having financial trouble, you do not need another payment weighing you down. This can be especially troubling if the payment is a large one. When you agree to a subprime auto loan, you could be tying your hands financially for the future. A huge car payment can be the source of significant financial distress.”
What we have to say
There is no question that bad credit auto loans carry higher interest rates than traditional auto loans. Because the lender is taking on more risk if you have bad credit, borrowers should expect to pay higher than normal interest rates. But there are at least three ways to lessen the impact of these higher rates:
1. Plan on coming into the loan with at least 10 percent down in cash or trade equity. The larger the down payment, the less you will need to finance – which will lower your monthly payment and reduce your interest expenses at the same time
2. Buy an affordable compact or midsize vehicle and put off looking at your dream car until after you’ve reestablished your credit. The lower the selling price, the lower your monthly payment and overall interest expenses will be.
3. Keep the loan term as short as possible to keep negative equity in the vehicle at a minimum. This will allow you to trade out of the vehicle sooner and, assuming all your payments have been made in a timely manner, enable you to more quickly apply for a new loan at a lower interest rate.
Article issue of the risk of repossession
“When you deal with subprime auto loans, there is a good chance that you will have your car repossessed at some point. Since the payments are often higher than you can afford over the long term, many borrowers get in the habit of missing payments as a result. When you miss enough payments on your auto loan, they are going to come and repossess the car. You will lose your primary means of transportation, which can lead to even bigger problems. When you don’t have a car to get to work, your job is on the line as well.”
What we have to say
With any car loan you will run the risk of repossession if you miss enough payments. If you read the fine print closely, you’ll notice that most regular loan contracts have a clause that states that the lender has the right to repossess the vehicle if you are even one day late with your loan payment.
To prevent this from happening with a bad credit auto loan, refer to the three suggestions we offered above.
Article issue of doing further damage to your credit
“Since there is a higher risk of repossession with subprime auto loans, there is also a higher risk of damaging your credit even worse than it already is. When you have a car repossession on your credit history, it will drastically affect your credit in every way. You will not be able to get a loan for another car or most likely anything else. A repossession will stay on your credit file for as long as seven years in most cases. Therefore, you will be living on a cash basis for the next seven years if this happens to you. Your credit is one of the most important things that you have. When you sign up for a subprime auto loan, you do not plan on being in the ‘bad credit’ category for your entire life. However, with the way they have it set up, it often leads you to stay there for a lot longer than you would like.”
What we have to say
Repossession is a big black mark on your credit history – you’ll get no argument from us about that. Repossession is especially bad if it happens to be with a bad credit auto loan lender. Once it happens, you won’t necessarily be living on a “cash basis” for the next seven years, but it probably will be at least two years before you can apply for another bad credit auto loan (with a higher down payment requirement due to your previous repossession).
But with that being said, if you approach a bad credit car loan in a responsible manner and basically follow the three steps that were outlined above, you should have a really good opportunity to reestablish your car credit and improve your FICO score at the same time.
As we see it
There is the smart way and then there are other ways of approaching a bad credit car loan. By choosing an affordable car, using a large down payment, and keeping the loan term as short as possible, you will give yourself a better chance of coming through the auto credit reestablishment process successfully.
For more information about subprime car loans, go to www.autonetfinancial.com and begin the process of rebuilding your credit by filling out our secure online credit application. If you need additional assistance, go to the “About Auto Net” tab and click on the “Contact Us” line where you will find our toll free number. Our customer service representatives are available to answer your questions during normal business hours.
