If you have bad credit, that doesn't mean that you can't purchase a car. It just means that you will have to work with a lender that offers bad credit car financing options. This means that your financing experience will be a little different than if you were working with a regular lender. Here are a few things you should expect when working with a bad credit car financing lender.
Higher Interest Rates
When you have a bad credit score, you show that it is risky for the lender to loan you money. As you present a higher risk than someone with a more responsible financial history, you will face a higher interest rate. That means that you will end up paying more for the vehicle if you take the entire loan term to pay it back.
As a simple example, if you need a loan of $10,000, and the interest rate for someone with good credit is 3%, they will end up paying $300 in interest. If your interest rate were 10%, you would end up paying $1,000 in interest to purchase the vehicle over the life of the loan.
This is a very simple example, but it illustrates how if you have bad credit, you will face a higher interest rate, which means you will end up paying a little more for the vehicle than a buyer with a better credit score.
Larger Down Payment
Next, if you have a poor credit score, the lender may want you to make a larger down payment. Historically, it is recommended that you place a 20% down payment when making a large purchase, such as for a house or a car.
The lender may ask you to put down a larger down payment when you have a bad credit score. Maybe they will ask you to put down 25% of the price of the vehicle. This increases your initial investment in the vehicle and decreases what they have to loan you. It also shows the lender that you may not have a good credit score but can save money.
Finally, your lender may want to know when you get paid when you have a bad credit score. Then, instead of having a randomly set due date for your loan, your loan's due date will correspond with your pay date. If you get paid once a month, you will pay one payment a month. If you get paid twice a month or weekly, your repayment plan will reflect this. The lender may require that you directly make a payment from your bank account and set that up as a loan condition. Essentially, they are coordinating your payments with your paycheck to increase the chance you will pay off the loan.
If you have bad credit, you can find a lender who is willing to work with you. The loan process may just be a little different than it would be otherwise if you were working with a regular lender. You may face higher interest rates, a larger down payment, and payday coordinated payment due dates for your loan. Contact a service that handles bad credit car financing to learn more.