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Wheels: Subprime car loans and bad credit finance explained

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THERE are few things more desirable than a new car, and thanks to finance deals factory-fresh wheels have never been more attainable. However, outstanding debts, a history of late payments or the act of filing for bankruptcy can leave some people with a poor credit score that can make car finance harder to come by.

A poor credit history often makes it impossible to qualify for the 0 per cent APR offers that make some car finance deals so tempting. But fear not, because if this is the case for you there are still ways of getting great finance deals for a new car.

What is a subprime or bad credit car loan?

Subprime loans are loans that lenders agree with parties who might have more trouble than most following a steady repayment schedule. When it comes to car finance, there’s no distinct cut-off point where a loan is classified as ‘subprime’, and while there are lenders who specialise in ‘subprime car finance’, subprime loans can also be offered by mainstream companies.

There are a number of reasons why a borrower could be classified as ‘subprime’ by a finance company. A lack of credit history, big debts, bankruptcy and many other factors can all contribute to a bad credit score. Any of these — or a combination — could be used to refuse a finance deal on a car, at which point buyers can be directed towards subprime lenders.

In order to compensate for the risk that subprime borrowers pose, lenders usually hike up interest rates. Lenders have been known to charge as much as 42.9 per cent APR, which is in huge contrast to the 0 per cent deals that are regularly offered by manufacturers.

Subprime car loans may also come with other additional fees, while some will have adjustable interest rates, meaning that the interest you pay on the loan isn’t fixed, but varies according to the market. This kind of deal can become very costly in the long run.

In either case, a subprime car loan will mean that as a buyer you are very likely to end up paying more over the course of the loan period to make up for the greater risk the lender is taking on.

What’s the danger with subprime loans?

The 2008 financial crisis was started by risk-taking lenders handing out subprime loans to homeowners who couldn’t pay back their mortgages. Banks then bundled these loans together and sold them as assets around the world. As owners began to default on their loans, the assets turned sour and the market collapsed. Although car finance loans have been placed into similar bundles, the Bank of England has said the risk of a crash is not as great as with the housing market.

Instead, the risk with bad credit car loans is twofold. First it’s with the car buyers: if they’ve been sold finance which they either do not understand or cannot afford in the long run, they may risk defaulting on the loan. Falling behind on payments could lead to the car being repossessed, will hurt your credit score further and could lead to you being declined finance altogether.

This was the primary concern of a Financial Conduct Authority investigation in 2019: have the terms and conditions of the loan been properly explained to the customer and has the lender taken enough precautions to make sure the borrower is able to pay back their car loan?

The second risk is to the car market in general. If a large economic shock were to take place where borrowers suddenly find themselves unable to pay their loans, car manufacturers and dealers could see major falls in revenue. Forecourts could fill with more used cars, driving down prices and damaging the car market as a whole.

The Bank of England has already raised concerns about the growing reliance on finance. A blog by an economist at the Bank of England said: ‘The industry’s growing reliance on PCP has made it more vulnerable to macroeconomic downturns.’

Should you avoid subprime car finance?

Not necessarily. If your credit score isn’t very high for any particular reason, but you have the finances to pay back the loan, then there is nothing wrong with a subprime car loan. All it means is that you’re probably going to pay more in interest and fees than a borrower able to buy from a dealer or lender offering standard car finance deals.

However, there are major pitfalls that one can easily fall into in the rush to get a new car on your driveway. It’s imperative that before you sign on the dotted line you understand all of the terms and conditions of the agreement, and more importantly are able to adhere to them. Don’t take out a finance deal that you can’t afford to pay back, and that means understanding exactly what the agreement is going to cost you over its entire term.

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Types of car finance explained

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Martin Lewis issues guidance on using credit cards to build ratings – best deals | Personal Finance | Finance

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Martin Lewis regularly urges savers to use caution when utilising debt themed products but at the same time, he acknowledges the need for a decent credit rating to get by financially. Today, the Money Saving Expert was questioned by viewer Miranda on how one can build their credit rating in difficult circumstances.

“What I’d then like you to do is go and do £50 a month of normal spending on it, things you’d buy anyway.

“[Then] Make sure you pay the card off in full every month, preferably by direct debit so you’re never missing it because the interest rate is hideous.

“That way you won’t pay any interest.

“You do that for a year, you’ll start to build that credit history, showing them you’re a good credit citizen.

“Then you’ll be able to move into the sort of more normal credit card range.

“So, bizarrely, to get credit you need credit. What credit will you get? Bad credit, go get the bad credit just make sure it doesn’t cost you.”

Consumers of all kinds may not have the best options at the moment as recent analysis from moneyfacts.co.uk revealed.

In mid-November, they detailed that a number of high street banks have cut the perks and interest on a number of their current account deals.

On top of this, the Bank of Scotland and Lloyds Bank made credit interest cuts of up to 0.5 percent.

Rachel Springall, a Finance Expert at moneyfacts.co.uk commented on the few options consumers and savers currently have available: “Clearly, it is vital consumers decide carefully if now is the time to switch, but if they wait too long, they may well miss out on a free cash switching perk.

“At present, providers will be assessing how they can sustain any lucrative offers in light of the pandemic.

“With this in mind, we could well see more changes in the months to come and if this does indeed occur, consumers would be wise to review whether their account is still worth keeping.”



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Should you use a balance transfer to pay off debt?

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Should you use a balance transfer to pay off debt?
Image source: Getty Images.


A balance transfer might be the solution if you have debts and want to gain control over your finances. But whether a balance transfer is right for you will depend on a number of factors.

Things to consider before using a balance transfer

The size of your debt

If you want to apply for a balance transfer credit card, be aware that most providers will allow you to transfer up to 90% of your credit limit.

Your credit limit will be dependent on your own personal circumstances, including your salary, your credit history and your residential status (homeowner or renter).

Be realistic about your debt. For example, if you earn £25,000 per year and you have a debt of more than £15,000, a balance transfer might not be cheapest way to pay the debt.

The time taken to pay the debt

The main advantage of a balance transfer credit card is that many offer an interest-free period on the balance. So, if you can pay off your balance in that period, you won’t accrue any further interest charges.

However, these periods typically range from 18 to 24 months, so if you think you will need more time to pay the debt, you may need to factor in additional interest charges when the interest-free period ends.

Whether or not a balance transfer is the right debt payment solution will depend on your personal circumstances. Check our balance transfer calculator if you want to work out how much a balance transfer could save you in interest payments.

Your credit score

The advantage of a good credit score cannot be underestimated in this situation.

When applying for a balance transfer credit card, the company will check your credit score. Based on this score, they could refuse your application.

Even if you are accepted, if you have a bad credit score they could reduce your credit limit. Ultimately, this will determine the benefit of a balance transfer as a suitable debt payment solution.

If you think your credit score might be a problem, it’s worth checking with the credit reference agencies before applying. That way you can avoid any nasty surprises.

There are three main consumer credit reference agencies in the UK. They are Equifax, Experian and TransUnion (Noodle).

Alternative solutions to balance transfers

You could still use a balance transfer even if the size of your debt is bigger than the credit limit.

Transferring part of the debt would enable you to benefit from any interest-free period, where applicable.

Alternatively, if you have multiple debts, you could consolidate all of your debts so that you can make a single regular payment. If necessary, you could do this using an unsecured personal loan over a period longer than 24 months.

Take home

Look at your own personal circumstances with a critical eye. Remember that you need to factor in living expenses when thinking about how long it will take you to pay off your debt.

Balance transfers are a useful method for debt repayment, but be aware that credit cards are an expensive way to borrow money. Take full advantage of any 0% deals wherever possible. Check out our list of the best 0% credit cards.


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Turn credit declines into a win-win | 2020-11-20

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The pandemic has left millions of people needing credit at a time when lending standards are tightening. The result is a lose-lose situation—the consumer gets a bad credit decline experience and the credit union misses out on a lending opportunity. How can this be turned into a win-win?

The case for coaching

Let’s start by deconstructing the credit decline process: The consumer is first encouraged to apply. The application process can be invasive, requiring significant time commitment and thoughtful inputs from the applicant.

After all that, many consumers are declined with a form letter with little to no advice on actions the applicant can take to improve their credit strength. It is no wonder that credit declines receive a poor Net Promoter Score (NPS) of 50 or often much worse.

On the flip side, forward-looking credit unions provide post-decline credit advice. This is a compelling opportunity for several reasons:

  • Improved customer satisfaction. One financial institution learned that simply offering personalized coaching, regardless of whether or not consumers used it, increased their customer satisfaction by double digits.
  • Future lending opportunities. Post-decline financial coaching can position members for borrowing needs even beyond the product for which they were initially declined.
  • Increased trust. Quality financial advice helps build trust. A J.D. Power study noted that, of the 58% of customers who desire advice from financial institutions, only 12% receive it. When consumers do receive helpful advice, more than 90% report a high level of trust in their financial institution.

Provide cost-effective, high-quality advice

AI-powered virtual coaching tools can help credit unions turn declines into opportunities. Such coaches can deliver step-by-step guidance and personalized advice experiences. The added benefit is easy and consistent compliance, enabled by automation.

AI-based solutions are even more powerful when they follow coaching best practices:

  • Bite-sized simplicity. Advice is most effective when it is reinforced with small action steps to gradually nurture members without overwhelming them. This approach helps the member build momentum and confidence.
  • Plain language. Deliver advice in friendly, jargon-free language.
  • Behavioral nudges. Best-practice nudges help customers make progress on their action plan. These nudges emulate a human coach, providing motivational reminders and celebrating progress.
  • Gamification. A digital coach can infuse fun into the financial wellness journey with challenges and rewards like contests, badges, and gifts.

Virtual financial coaching, starting with reversing credit declines, represents a huge market opportunity for credit unions. To help credit unions tap into that opportunity, eGain, an award-winning AI and digital engagement pioneer, and GreenPath, a leading financial wellness nonprofit, have partnered to create the industry’s first virtual financial coach. To learn more, visit egain.com.

EVAN SIEGEL is vice president of financial services AI at eGain.

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