If you have bad credit, it is still very possible to obtain an auto loan. The problem is not everyone out there has the intent to help you with that. Some offers may seem amazing at first glance, but if you look at the fine print, you may be getting yourself into an even worse financial situation. There are a few items that you need to look out for when completing an auto loan if you have bad credit. The most important thing to look at would be the sale price and interest rate. People commonly make the mistake of only looking at the monthly payment instead of the final cost to fully finance a vehicle. This various greatly in the three main types of auto loan distributers tailored for people with bad credit. They are as follows:
- Sub Prime Lenders
- Buy Here, Pay Here
Each one of these auto loan distributers have their pros and cons and can be a good fit depending on your financial situation. We’re going to discuss all three, state the pros and cons and a brief summary of what to look out for with each type. Let’s begin!
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Sub Prime Lenders
Sub prime lenders are lenders who specifically target individuals with bad credit. What sub prime means is that you have a credit score that is considered fair or bad. This would be for people who have a credit score that is in the lower 600 range and below. This sounds like it would be the best option for someone with fair or bad credit to obtain a car loan, right? Unfortunately this is not always the case. Sometimes the interest rates on these types of loans are very high and front-loaded. What this means is that the first year or so, you will be making payments almost completely on interest alone if you make the recommended monthly payment. The principal amount will barely be reduced until later down the line with consistent payments.
An example of this would be the loan I took out on my car before I fixed my credit. I was new to the car dealership game and didn’t properly educate myself before making a purchase. The total loan for the car was approximately $12,000. The interest rate on the loan I procured was 24% (this is VERY high). This was spread out throughout 4 years. Over the course of 4 years, I made just the agreed upon monthly payment. At the end of the deal, I spent $18,000 on the vehicle. This means I payed 150% of the vehicles value (not before depreciation). Please thank me for saving you from doing the same mistake (see how what I did to fix my credit). Here are some of the pros and cons of subprime loans.
Pros and Cons
- They literally will accept almost all applicants for some type of auto loan
- Good variety of cars to choose from
- Not limited to undesired vehicles
- Loans can be used at most traditional dealerships
- Most of these loans have a very high interest rates
- Some dealerships will restrict you to purchasing only certain vehicles with this loan
- Extended loan terms for a low payment that may end up costing more
There are some good sub prime lenders that really do have the customers best interest at hand. If you do go that route, try to look for one that will offer you an interest rate of below 10%. This will take some searching on your end, but the goal is to get a loan with the least amount of interest within a reasonable term. Not every sub prime lending company is out to get you, but make sure you do your research before going to the dealership. Stay within your budget and get a car you can afford without breaking the bank.
Buy Here, Pay Here
Buy here, pay here dealerships are another viable choice for those with credit challenges. What buy here, pay here means is that you are financing the car directly through the dealership and not through a bank or financial institution. This allows the dealership complete control on who they approve or deny for a loan. While this does look appealing, be sure to read between the lines. Sometimes, the offers really are too good to be true. Let’s look at some pros and cons with these types of loans.
Pros and Cons
- The dealer is in charge of financing, meaning more financial situations will be eligible for an auto loan
- Typically you will pay little to no money down for the loan
- The process of securing the loan is fairly simple compared to a traditional dealership
- Most offer a small window of time where you can return the vehicle free of obligation
- Not all buy here, pay here dealerships report to the 3 major credit bureaus
- GPS or vehicle tracking devices are sometimes installed on the vehicles due to the higher risk of default on the loans
- Interest rates on these vehicles are ofter hovering around the legal limit (VERY high)
- Many buy here, pay here dealerships do not offer warranties on the vehicles they sale
- Payments and terms are typically high or unfavorable
The vehicles at these dealerships are predominantly used, but in some cases they do stock new or newer vehicles. While the vehicles for the most part are in good shape, there have been quite a few reports of “lemons” being purchased at buy her, pay here lots. Lemons are cars that look like a good value (cosmetically) initially, but break down or have repeat defects shortly after purchase. If you are to get a vehicle at a buy here, pay here lot, I would highly recommend getting the vehicle inspected by a trusted mechanic. At the end of the day, it’s your money to lose in this case.
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Rent to Own
If you don’t have credit and feel as if you are not financially stable enough for a full auto loan, then rent-to-own financing is a good route to explore. While the payments are similar in size to a sub prime or buy here pay here payment, you still are essentially making payments on the car without it being tied to your credit. What this means is that you can either rent the car with the intention of owning it (making consistent payments), or you can make payments only as long as you need the car. This is great for those who are not yet financially stable and need a vehicle for a duration of time. Here are some pros and cons of rent-to-own vehicle financing.
Pros and Cons
- You do not have to pay interest on the vehicle as you are not borrowing money
- Repossessions will not impact your credit as these are typically not reported to the credit bureaus
- Credit score won’t stop you from getting the vehicle of your choice
- There will be no negative effect on your credit
- Typically the amount you pay for the vehicle is much more than the actual Kelly Blue-book value
- It will not help your credit in any way since they do not report to the credit bureaus
- Payment frequency is much higher than what you’d experience in either a buy here, pay here or subprime lender loan
The cars that are offered through these types of loans tend to be used with somewhat high mileage. However, most are cosmetically well taken care of and mechanically in good shape. While you won’t find something like a newer-model Audi at a rent-to-own location, you will find some quality, long lasting vehicles that will fulfill your needs. Most people come away satisfied overall with their experience dealing with these types of car dealerships. As previously mentioned, you will pay a premium for the vehicle of interest, but if you have not-so-good credit and are not financially stable, this would be a good route to go for reliable transportation.
It’s Your Money
At the end of the day, it’s your money going towards the purchase of a new automobile. Choose the auto loan type that works best for your financial situation. Remember, you want to get the most vehicle for your money. Try to get the vehicle you want to as close to Kelly Blue Book Price as you can (Visit www.kbb.com to see how much a vehicle is worth). If your only option is a loan with high interest rates, try to negotiate a contract where you can pay more than the required monthly payment (make sure that additional amount will. Make sure the extra money will apply to principle. That way, you are reducing the amount of money you are paying towards interest and will pay off the car much sooner than the loan term. Thank you for stopping by The Credit Dojo. As always, we hope you’ve learned something!
If you wish to learn more about credit, how it works and how you can fix your credit, then visit the following articles for more information:
Credit Score For Mortgage – A Proper Guide
Home ownership is a dream for many, and it shows in the data. As of 2020, 65.8 percent of homes in the US are occupied by the owner. Even in a country where housing price growth has outpaced inflation since 2010, people are still lining up to purchase homes. Get to know how to prepare credit score for mortgage.
Sometimes, though, it may not feel like home ownership is a possibility for everyone. Millennials are particularly pessimistic about their ability to ever be able to afford a home, and they’re concerned that they might not be able to budget for their first home. Not only that, but many people who would otherwise be able to afford a mortgage can’t seem to qualify for one. After the 2008 financial crisis, banks made lending requirements much more strict in order to prevent a housing catastrophe from ever happening again.
The Federal Housing Finance Agency (FHFA) has developed stress tests to assess the likelihood of a mortgage going into default due to macroeconomic factors that influence interest rates. Banks no longer want to hold mortgages that could go into default in case interest rates go up. What’s more striking is that many banks are requiring much higher down payments on homes. As a result, many people can’t qualify for a mortgage, even if it’s their first mortgage.
If you don’t qualify for a mortgage, there’s still a way that you can buy a home. The secret is owner financing.
What is Owner Financing?
Owner financing (otherwise known as seller financing) is a scenario in which the seller of a home decides to provide financing to the buyer directly, rather than the buyer securing their own financing through a bank or a mortgage lender.
The way this works is that the buyer signs a promissory note to make payments as specified by the seller. They can set the interest rate (with some restrictions) and the terms for the agreement. Typical owner financing agreements last five to ten years, after which time one final lump sum payment (also known as a balloon payment) is due.
This may sound a bit strange in a world where mortgages are typically the way to go. However, there are plenty of reasons why a seller may want to offer financing to the buyer directly.
Reason #1: Sellers Want to Sell More Quickly
Selling a home takes time, even once you have a buyer, and many aspects of the process are not in the seller’s control. A buyer needs to secure their financing, which can take some time. The closing process can involve many headaches as well. By financing the home themselves, they can skip a lot of this headache and simply provide the buyer with credit themselves.
They may be selling a home that needs a lot of work done to it, and by providing financing to the buyer, they can prevent themselves from having to take on an expensive and lengthy renovation project which they may not be able to afford.
Reason #2: Seller Can Set Their Own Terms In Case of Default
When someone defaults on their mortgage, the home is then put into foreclosure. Foreclosure is a legal process that allows a lender, in some cases, to repossess the home and put it up for auction in order to cover the costs of the debt in default. However, a seller might not be interested in doing this in case the owner defaults and may instead want to just take the home back, keeping the down payment and any payments made.
Reason #3: Seller Can Sell The Debt Themselves
Seller financing involves a fair bit of risk on the part of the seller, but they don’t necessarily need to be the one to take on the risk if they don’t want to. At any time, they can sell the promissory note signed by the buyer to some investor looking for cash flow.
What Are The Pros and Cons of Owner Financing?
Pro #1: You Don’t Need To Qualify For A Mortgage
Qualifying for a mortgage can be tough, particularly if your credit is less than stellar. By getting financing from the seller of the home, you won’t need to go through all that hassle. If your credit isn’t good enough to qualify for a mortgage, it’s okay: some sellers will gladly work with you regardless.
Pro #2: Closing is Cheaper and Faster
As stated before, sellers who opt for owner financing generally want to take advantage of a quicker sale. As a buyer, you can save on closing costs and save a considerable amount of time, with a lot less of the headaches involved in closing on a property.
Pro #3: No Minimum Down Payments
The seller will decide what down payment they’re willing to accept. Some sellers will want a larger down payment, but others may be willing to let go of their home for less money down.
Con #1: Higher Interest Rates
Sellers are taking on a greater level of risk by providing financing to the buyer, and because of this higher risk they want to see greater returns. As a result, they will typically set a higher interest rate than you would see from a mortgage lender. Your interest rate, your amortization schedule, and your lump sum payment due will all be in the promissory note that you sign.
Con #2: All decisions are at the seller’s discretion
Just because a seller is willing to finance a buyer doesn’t mean they’re willing to do it for you. If you have bad credit, your chances of being able to secure an owner financing deal are lower, due to the fact that many sellers may not want to take that risk.
Con #3: A balloon payment is typically due at the end of the term
Terms are generally kept short, usually between 5 and 10 years. At the end of the term, the last payment is due and it’s a large lump sum payment for the remainder of the loan. If you are unable to secure the financing necessary to pay for this lump sum, you could potentially lose your house AND all the money you’ve paid.
How Do I Find Seller-Financed Homes?
Sellers willing to provide financing are rare and finding them takes a bit of upfront work. If you’re in the US, there are many places you can find seller-financed homes. The simplest way is to get on your local classifieds site such as Craigslist and send a message to sellers asking if they’d be willing to provide owner financing. Another way is to visit a local MLS site and search for homes that are listed as for sale by owner. Then, check each listing’s comments section to see if they’re willing to provide owner financing.
You can also drive around areas and look for homes that have signs that say “For Sale By Owner”. This doesn’t mean they’re willing to provide financing, but they’re more likely to be willing to do this kind of deal.
Real estate agents are a goldmine of information, too. Call up real estate agents in your area and ask if they know any sellers willing to provide owner financing. Some agents might not have anyone in mind, but others will. You should also tell them to let you know if they come across sellers looking to provide financing.
All in all, you will have to put in more work to find homeowners willing to sell their home to you AND provide financing as well. But, if you can’t qualify for a mortgage today and you want to get into the real estate market, this may be a good option for you.
If you decide that you’d rather get a mortgage instead, check out our guide on how to prepare your credit score for a mortgage!
5 Things You Can Do Now To Improve Your Credit In The Long Term
Many people ask “how can I improve my credit now” looking for tips that will help them put 100 points on their credit score in a month. Now, depending on your credit score situation, you may be able to do this. However, if you’ve got a 680+ credit score, it’s highly unlikely that you’re going to be able to add so many points in such a short amount of time.
Instead, think about how you can improve your credit in the long term in order to get closer to that coveted 850 credit score. Here are some tips to help you improve your credit.
Start snowballing your debt.
Snowballing your debt is a debt elimination strategy espoused by personal finance expert Dave Ramsey. This strategy essentially has you pay off your debts starting with the smallest balance. What you do is simple: set up minimum payments for all your current debt except your smallest debt balance. You pay as much over the minimum as you can afford on your smallest debt balance. This way, you start eliminating debt one at a time. When one piece of debt is paid off, you take what you were paying on that debt and allocate it toward the next smallest balance.
This debt elimination strategy is effective for several reasons. First, it focuses on getting rid of each debt item and freeing up more cash to pay down the larger debt balances. Second, it takes your mind off of the more expensive debt and keeps you focused on the long term goal: being debt free.
As an added tip: paying down credit cards will have a bigger effect on your credit score than paying down nearly any other type of debt. If you’re concerned with your credit score, get rid of your credit card debt as soon as possible!
Set up automatic payments for as many bills as possible.
35% of your credit score is determined by your payment history. Most people have a lot of different bills they need to pay, and it can get hard to manage. Automatic payments takes the brainwork out of paying your debt obligations. Whether you’re paying the minimum balance or you’re trying to get rid of the debt ASAP, automatic payments can help make sure that you never miss a payment.
A good payment history isn’t just important for preventing your score from dropping. The longer you go without missing any debt payments, the better it is for your credit score. Most people should see their credit score increase over time so long as they’re making all their payments on time and not being overzealous with their borrowing.
Request credit limit increases (but don’t change your spending)
Another part of your credit score is based on how much debt you owe in relation to your available credit, or your credit limits (when referring to credit cards). The ratio of your card balances and your credit limit is called your credit utilization ratio. If you have a credit limit of $5,000 and you currently owe $2,000, your credit utilization ratio is 40%. The lower this ratio, the better, and generally speaking you want a credit utilization ratio under 30%.
Increasing your credit limit is a way to “hack” this. Although getting a credit limit increase will reduce your credit score in the short term, the reduction to your credit utilization ratio will be beneficial in the long term so long as you don’t change your spending habits! For this reason, many financial advisors don’t actually recommend this because some people may believe that they have more money available at their disposal. You, however, should know that this is not true and that just because you have more credit doesn’t mean you should borrow more.
Dispute any items on your credit report that seem suspicious to you.
Sometimes, credit bureaus and lenders make mistakes. People often pay for these mistakes and don’t even know it because their credit report might have errors that they’re unaware of!
In order to have as much control over your credit as possible, you need to be aware of what’s actually on your credit report. If you haven’t, get your free annual credit report from each of the three credit bureaus. You’re entitled to receive a credit report from each credit bureau once per year by law. Learn more about the Fair Credit Reporting Act (FCRA)!
Once you’ve taken a look at each of your credit reports, look for items that you don’t recognize. If you see any, it’s time to start the dispute process. To do so, you’re going to need to call each of the credit bureaus that is reporting the item in question and file a dispute claim. This process can take some time. If the item in question is indeed incorrect or fraudulent, then you can have that item removed.
One ounce of prevention is worth a pound of cure, and the best way to prevent problems from occurring on your credit report is to make sure that nobody can take out debt in your name.
This tip isn’t really going to improve your credit score: instead, it’s going to prevent it from going down in case your identity gets stolen. If your credit is frozen, it means that nobody (not even you) can take out new debt in your name. This means that you can’t open new credit cards, get a new mortgage, or borrow any more money.
To freeze your credit, you will need to contact each of the three credit bureaus. To do so, click the below links to be redirected to the Equifax, Experian, and TransUnion websites and follow the directions provided.
If this sounds detrimental, don’t worry: it’s not. You can unfreeze your credit at any time by contacting each of the three credit bureaus, similarly to how you froze your credit initially. It takes some time before your credit can be unfrozen, but once it is, you’ll be able to take out loans and open new credit cards again.
How To Build Your Credit If Your Credit Is Bad
Bad credit affects millions of Americans and many of them don’t know how to get out of the hole. Having bad credit can prevent you from getting home loans, car loans, an apartment, and could even bar you from getting certain types of jobs. People with bad credit end up paying higher interest rates on loans, as well. Needless to say, bad credit could make your financial life much harder.
There are ways for people to repair their credit, even if they are having trouble keeping up with their debt. Here’s how you can start over and rebuild your credit, even if your credit score is currently in the dumps.
Get your credit reports and read them in detail.
Your credit report has all the information you need to start repairing your credit now. It’ll include your payment history, as well as any items that are past due, in default, or in collections.
There are three major credit bureaus in the United States: Equifax, Experian, and TransUnion. All three of these bureaus are required by law to provide you with a free credit report once per year. If you’re ready to start repairing your credit, then get all of these reports and read them.
Without reading your credit report in detail, you can’t possibly know what is affecting your credit score. The biggest problems that you might find on your credit report are items in collections, items in default, past due items, missed payments, and high utilization ratios on your credit cards.
Other issues that can affect your credit score drastically are tax liens, foreclosures, and bankruptcies. However, these are almost never a surprise to anyone. If you unexpectedly find these items on your credit report, or any other item that you don’t recognize, then it’s time to start the dispute process.
Dispute any items on your credit report that you don’t recognize.
Credit bureaus are run by people who get information from other people who work for loan servicers and lending institutions. For this reason, it’s not uncommon for people to have items on their credit report that should not be there.
Typically, these amount to clerical errors or mistaken identity. If you see anything that shouldn’t be on your record, it’s time to start the dispute process. Before you do, we recommend that you contact the loan servicer and ask them about the loan in question. They should be able to confirm whether or not the loan belongs to you, and if it doesn’t, then you can start the dispute process with the credit bureau with confidence that it will eventually be removed.
However, you may find debt on your credit report which DOES exist in your name, even though you may have no recollection of taking out that debt! This is a tell-tale sign of identity theft, and in this instance, it’s time to take action. Contact the credit bureaus that are reporting the fraudulent debt and have them begin the dispute process. In the meantime, ask them to freeze your credit so that no more loans can be taken out in your name.
Settle any items in default or in collections.
Items in default or collections can have a major negative effect on your credit score. As a result, it’s important to make sure that you get the debt settled right away.
Settling the debt does not necessarily mean making payments toward it! Making those payments won’t make any difference to your credit score as you’ve already got a black mark on your report. Instead, you want to make sure that you have an agreement with the owner of the debt. You’ll have to negotiate these items with the lender by calling them directly. If an item is in collections, it means that the original lender is no longer servicing the debt and you’ll have to go to the collections agency that is responsible for collecting the money.
In general, companies would rather get some of the money back rather than none, which gives you some room in negotiations. They’re generally understanding of a difficult financial situation and simply want to get as much of their money back as possible. By negotiating with the agency you may be able to reach an agreement to pay off the debt for less than you owe.
You may be able to get some of these items removed by asking the creditor, but in general, items in default or items that go into collections will stay on your credit report even after you settle them. They go away after 7 years, though, so they won’t be around forever, and the more time that passes from the original date of delinquency, the less weight it carries.
Calculate the remaining debt that you have.
Now that you understand the contents of your credit report, it’s time to get an estimate of how deep in debt you really are. Your credit report will also have some important information about your debt balances. They may not be 100% accurate, but that’s okay: simply contact the lender responsible for the debt and they will be more than happy to tell you how much you owe them.
Tally up all your debt and see how much you owe. You can only move forward when you know exactly what you owe. From here, it’s time to make a plan to pay it off.
Make a plan to pay off your remaining debt.
Paying down your debt is the next step to improving your credit score. Your credit score is based in large part on your payment history and the amount of debt you owe. By creating a good payment history and reducing your overall debt burden, you will see positive changes in your credit score that add up over time.
One popular strategy is called snowballing. Made popular by financial guru Dave Ramsey, snowballing your debt is when you pay the minimum payments on all your debt except for the smallest balance, which you put as much money into paying off as possible. Once that balance is done, you move onto the next smallest balance. Keep repeating this until all your debt is paid off. This process can take years for some people.
But, sometimes the debt you owe is simply too much. Your interest rates might be too high, or you might not be able to afford even the minimum payments. Don’t worry: you have options.
Options to help you pay down debt:
this is when you and the lender agree to a new loan with different terms, usually with a different payment schedule and interest rate. This can be a good option if your payments are high due to a very high interest rate.
this is where a company lends you money to pay off your previous loans so you’re only responsible for one large loan to the consolidation company. This can be a good option if you need lower payments on your debt.
Balance transfers (for credit cards):
Some banks allow you to put the balance of one credit card onto another, often with low introductory interest rates, so that you can more easily pay off that card. Make sure to read the fine print of the balance transfer agreement!
Pay any and all payments on time, no exceptions.
Once you’ve committed to making payments on your debt, make sure that you make those payments! Missing a payment could seriously harm your credit score. If at all possible, set up automatic payments with your lender and your bank so that you never miss a payment.
If you can’t make a payment due to lack of funds, make sure to speak with your creditor. They will likely help you, since they’d rather get something now rather than nothing. They may be able to change your payment date or agree to accept a larger payment later on. You never know until you ask, and it’s much better than simply leaving a debt to go into default.
If you’re wondering why you should spend the time and effort repairing your credit, learn about the benefits of having an 850 credit score!
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