Financing a Vehicle With Poor Credit

December 4, 2008

If you’re in the market for a vehicle, then your options are pretty staggering. There’s both new and used cars to consider, but each of these are provided in so many ways that it can be difficult to figure out what’s right for you. This is especially true if your credit isn’t very good. When looking at vehicles and comparing your options, they may seem a bit restrictive. Poor credit means auto financing is something that takes a considerable amount of money — and that’s only if you can get a loan in the first place.

Luckily, even those individuals who have less than decent credit can manage to obtain a vehicle. They’ll probably be looking at paying more, but this is where it’s important to understand how to approach your available options and to determine which one is right for you. You can find all sorts of vehicles at any price, and with multiple ways to own them, but financing usually means that you’re looking at a dealership of sorts that specializes in new or used vehicles.

Anybody who has bad credit will typically get very high interest rates on an auto loan. This isn’t necessarily the worst thing though, considering that it may be in your best interest to finance. Because of that, you want to know how a high interest rate affects your payments, and what it means in terms of how much you pay altogether.

Simple put, the more expensive a vehicle is, the more you’re going to pay in terms of interest. If you’re looking at a used vehicle that is $10k and you have an interest rate of 12%, depending on how many months you choose to make payments, you could be paying over $2k more for that vehicle. That being said, you may want to buy a used car that is relatively inexpensive. You don’t want to get something that is a junker of course, but if you aim towards a moderate price range and you provide a reasonable down payment, then you can expect to not pay all that much even with a high interest rate.

Let’s say you looked at a vehicle that is $5k. You provided a down payment of $2k and got a loan for the rest with the same interest rate as before, 12%. If you were to extend your payments over the course of 36 months, you’d only be paying $600 more on that loan. It’s still a lot compared to what you borrowed, but the lump sum is much less than it would be for the previous vehicle. Of course, you can pay even less total if you choose to pay larger amounts in a shorter period of time. That same loan of $3k paid back over the course of 12 months amounts up to adding only 200 dollars to the total. A significant difference! Of course, you have to budget wisely for that, because the payments would be very high.

Regardless of how you approach it, you can always improve your credit over time and refinance your loan. Just be certain to compare your options wisely and to understand what they offer you. You don’t want to get stuck paying a fortune on a vehicle you don’t like, after all.