At some point or another, everyone’s heard a story about someone who’s made a bad credit decision, and then has to pay for that decision with inflated credit rates for a number of years. While some of these forms of bad credit repair are good for what they are designed to do, others do nothing more than take advantage of a bad situation to line the pockets of those who own the business. If you believe that a car dealership is taking unfair advantage of you because you have poor credit, the best recourse is to report that dealership to the Better Business Bureau.
If you’re looking for credit repair though, and need to obtain a car loan, you can still find relatively good rates on auto loans, but not, perhaps, where you might expect to find them.
One way that disreputable dealerships make money is by engaging in practices that do not allow the people who purchase their vehicles to pay off loans early. The loan may involve a stiff pre-payment penalty, or it may simply not allow the purchaser to make more than a set payment amount. Coupled with interest rates that are as high as legally allowable, such practices can easily double the price of a vehicle by the time it has been paid off.
For instance: Say that a car at a discount lot is priced at what appears to be a reasonable $3,000. The lot says that you only have to pay $500 down, which means that you’re financing $2,500. In some states, the legal limit for how much interest that can be charged on a used car can be as high as 27%. Let’s be a touch more conservative, however, and call it 25%, which is still high. On a 48-month loan (let’s also say you can’t pay it off early without a penalty) The monthly payment is just about $83, but over the life of the loan, you’ll pay $1,590 worth of interest. All told, you’ll be paying $4,590 for that $3,000 car. The same terms on a 10% interest rate would save you $1,000 on the loan.
Are there bad credit auto loans that carry a 10% interest rate? Sure. Check with your current credit card company. Many offer some sort of auto financing that, while not being as affordable as typical bank rates that range between 3% and 5%, will still help pave the way for you to get your credit back on track.
So, what dealerships to avoid? Be cautious whenever you’re on a dealership lot on which nearly every vehicle seems to have over 100,000 miles, and no new cars are sold. In addition, be careful about dealing with “buy here, pay here” dealerships. While some may be a good deal, it is critical that you look through the finance paperwork before committing yourself to anything. Make certain that you can opt to pay off the loan early, if you wish. This leaves open the possibility of refinancing later if you need.
Consumer advocacy groups exist that can help you to navigate through buying a car when you have poor credit. While it may sound scary, in the end, you’ll find it can be easier than you think.
Bankrate.com: Auto Loan Calculator: www.bankrate.com
Autotrader: “5 questions to ask buy here pay here dealers”; www.autotrader.com