The media have long made up their mind:
Bad credit car loans are a serious problem and need to disappear!
Just open up the newspaper to a random page and you’ll find plenty of articles condemning financial institutions offering sub prime credit.
But are things really that simple?
In reality, bad credit can affect us all. As you may know from personal experience, once you’re on the downward slope, it’s extremely hard to get back on track again. Without a decent credit rating, it can be hard to get a car loan. And without a car, finding a suitable job can turn out to be a problem.
And thus begins a vicious cycle.
Admittedly, bad credit car loans may not be your favourite option. But they can provide you with the all-important financial support you need. At Concept Car Credit, we’ve helped thousands of customers with bad credit with finding a loan and getting behind the wheel again.
In this special, we’ll take a look at these loans and investigate how bad they really are. Should you take out a car loan despite bad credit? Let’s find out …
Bad Credit Car Loans #1: Guaranteed Loans – guaranteed to fail?
The most frequently advertised version of a bad credit car loan is the so-called guaranteed loan. Simply put, the word ‘guaranteed’ here means that your credit rating, credit history and income situation don’t matter:
You are sure to get a credit if you apply.
The guaranteed loan sounds like an incredible proposition. No more nerve-wrecking negotiations. No more begging for a loan. And most importantly: No more nasty employees combing through your entire financial past.
On the other hand, guaranteed loans do come at a cost.
When you take up a loan, the interest rate is calculated on the basis of the risk of you defaulting. This risk is obviously lowest if you have a stable income, a secure job and an excellent credit rating. With a fluctuating income, a bad credit rating and possibly even being out of work or in bankruptcy, the risk increases.
This is why guaranteed loans are typically extremely expensive. The interest paid over the course of the loan is usually horrendous. This doesn’t mean you should never apply for one. But does mean that they’re an option you should only chose if you really have no other choice.
As we’ll show you towards the end of the article, there are definitely better options available to you.
Bad Credit Car Loans #2: Buy here, Pay here, Regret here?
Buy here, pay here loans are a popular subset of bad credit car loans. These loans are not guaranteed in the sense that absolutely everyone is accepted. But the criteria for acceptance are a lot less strict than with your average bank loan.
The idea behind the concept is that the dealer has an active interest in you getting the loan. If you can’t scrape together the money, after all, you won’t be able to buy a car. To support you, he will therefore provide you the necessary credit, as long as you buy and finance the car directly with him. A bad credit rating is usually not an issue in these cases.
In practise, this is not how things usually pan out.
In truth, as the Balance has observed, buy here pay here loans “have a reputation for being overpriced, selling poor-quality vehicles, and taking advantage of consumers with bad credit.”
This is what you should watch put for:
If the annual percentage rate sounds absurdly high, or if a dealer can not show their license, you should definitely steer clear of their services. In the USA, as the Boston Globe has reported, some dealers will even remotely de-activate a car if the customer can no longer afford their loan payments. Needless to say, this is unacceptable.
On the other hand, buy here, pay here is by no means problematic by default. Respectable dealers can even sometimes offer better rates than many banks. And it is obviously highly convenient to be able to secure a loan with the very dealer you’re buying your car from.
No wonder, then, that the market share of buy here, pay here deals continue to grow.
Bad Credit Car Loans #3: Logbook Loans
Logbook loans are a form of bad credit loans that is available only in parts of the UK. Contrary to guaranteed loans, which are a very flexible category, logbook loans have to meet clearly defined criteria. This has not just made them more transparent, but also a lot safer.
That said, they remain a risky and expensive proposition.
Logbook loans work almost exactly like regular car loans. You borrow a sum of money and then repay the amount over the course of the loan’s term.
The devil is in the detail here:
- Logbook loans are always secured loans. More precisely, they’re secured by the car itself. So if you should fall into arrears, the borrower can then repossess the vehicle and sell it off to a different customer in order to get his money.
- Logbook loans typically have very high interest rates. An APR of 400% or more is by no means uncommon!
- Logbook loans typically run for longer than average. The maximum is 78 months and many customers take advantage of this long loan term to keep monthly instalments as low as possible.
It is certainly true that logbook loans are, strictly speaking, predatory. As the Money Advice Service has demonstrated, a £1,500 loan will cost you over £2,750 in interest! What’s more, consumer protection is lower than with competing products such as HPCs. And there is always the risk of you losing the car, even within sight of the finish line.
On the other hand, logbook loans are not entirely without their merit. For one, they can offer help in case you desperately need a car and just can not get a loan.
Secondly, the faster you pay back your logbook loan, the lower your interest load.
And finally, it is very rare for logbook lenders to actually seize your vehicle without you missing on a few payments.
Bad credit car loans: What to avoid
Although logbook loans are not strictly speaking unprofessional, they are situated at the very cusp of what is still acceptable. If you end up defaulting on a logbook loan, not only will you lose your car. You will also have lost all the money you invested in it. This deadly combination is something you should always keep in mind.
This begs the question:
Are there some general guidelines as to what you should definitely avoid when looking for a bad credit car loan?
Peerfinance 101 has collected some of the most important signifiers that something’s (terribly) wrong:
- Upfront fees: All loans come with interest payments and certain processing fees. That’s fine. But you should never have to pay anything before you actually clinched the deal.
- No physical address: This happens only very rarely. But do verify the address and google it if you feel unsure.
- Do not agree to any suspicious, unconventional payment options. An example given in the Peerfinance 101 article: The lender wires an amount of money to an account, supposedly to prepare for the transaction. They then ask you to wire the money back to you, so they can release the loan. What happens next is that they will wait for you to pay, then withdraw the money from the original account again – leaving you with nothing.
As you can see, there are plenty of potential scams out there. Which is why it is a great idea to try and improve your credit score to avoid becoming a victim.
How to improve your credit rating
As bankrate.com has correctly pointed out, your credit rating means different things in different situations. Whereas your current rating could only get you a sub prime mortgage, that very same rating might be enough to get you a more than decent car loan. The reason is that car loans are a lot less risky: There is less money involved and a car can more easily be repossessed than a house.
Then again, a bad credit rating is always bad news. And your best chances of avoiding a bad credit car loan is obviously to improve your credit rating. Maybe you have already given up on this possibility.
That, however, would be a mistake.
How to improve your credit rating #2
Regardless of your financial situation, there are always plenty of options at your disposal:
- Save some money before applying: This will also allow you to pay a larger deposit, which reduces the interest you need to pay.
- Setup autopay and/or reminders: Your credit rating depends on you not missing any payments. So make sure you never do. Reminders on your mobile phone are one easy way to improve your reliability. Autopay orders on your bank account are even better.
- Never default on a payment: Even if, by accident or neglect, you do miss a payment, make sure to catch up on it as soon as you can. If your lender transfers your case to a collection agency, you’re in serious trouble. Don’t let it come to that.
- Get a credit card and begin paying for your purchases with this card. If you never allow for a single penny of arrears to build up on it, this can significantly raise your chances of avoiding bad credit car loans in the long run.
Bad credit car loans: Your strategy
Even with the best intentions, it can sometimes turn out to be impossible to improve your credit rating. If this is the case, the best you can do is to come up with a clear strategy to avoid disaster.
To help you along the way, here are some of the best concepts to make the most out of bad credit car loans:
- Use a car loan calculator: We’re sure you’ve seen this around on the web. And without doubt, they’re highly useful, if you put them to your advantage. As badcredit.org has put it: “The ideal auto loan will be a balance of affordable monthly payments and reasonable interest fees. Loan calculators can be a great way to crunch the numbers and find the best balance.”
- Chose the safest option. As we mentioned above, logbook loans are a last way out if you really need a car. Buy here, pay here, however, can be a lot better. These deals tend to be cheaper, more flexible and less severe. And make sure not to aim too low. As we’ve stated before, your credit rating is worth more when applying for a car compared to finding a mortgage on a house.
- Focus on monthly payments and APR: You will find many articles online that warn against using monthly payments as your top priority. Rather, they advise, you should focus on APR, since this will tell you how expensive a loan really is. Although there is some truth in this, it is also true that you need to be able to afford your monthly payments, or you’ll eventually default on the loan entirely – with dire consequences. Striking a balance between these extremes is vital.
A bad credit car loan at CCC
At Concept Car Credit, we take all of the above into consideration. We offer in house financing, but we also offer highly competitive rates. When it comes to a bad credit rating, we are more flexible, but we won’t blindly take anyone (mainly to protect you from defaulting). We perform checks, but they are swift and efficient. We focus on affordable monthly payments without losing sight of your interest rates.
Best of all, we offer something desperately few other bad credit car loan providers do: A selection of some of the finest vehicles, all of which you can check out either in our Manchester showroom or in our digital showroom online.
We forward to hearing from you!