Good News About Bad Credit Car Loans

The Landscape of Car Financing in America

Nearly half of all car purchases in the United States are financed, according to the Federal Reserve. With approximately 30 million Americans facing credit issues, the demand for bad credit car loans is substantial (source). While these loans typically come with higher interest rates compared to prime loans, they are still accessible. Even individuals who have filed for bankruptcy can secure reasonable auto financing if they shop around.

Bad Credit Car Loans: Buying New

Advantages of Buying New

1. Peace of Mind: New cars come with the latest safety features and technology, providing a sense of security.
2. Customization: You have the freedom to choose optional features and specifications.
3. Warranty: New cars come with warranties that often last longer than those available for used cars.

Risks of Buying New

One significant risk is becoming "upside down" on your loan, meaning you owe more than the car's current value. To mitigate this:

• Down Payment: Aim for a down payment of at least 20%.
• Resale Value: Choose a vehicle with a high resale value to slow down depreciation.

Depreciation Facts

Depreciation is the difference between the Manufacturer’s Suggested Retail Price (MSRP) and the car's current value. A $25,000 car typically depreciates by 15% in the first year and between 7% and 10% annually over the next two years (source). Cars with prestigious nameplates tend to hold their value longer.

Bad Credit Car Loans: Buying Used

Advantages of Buying Used

1. Affordability: Used cars generally have lower monthly payments.
2. Slower Depreciation: Used cars depreciate at a slower rate, making them better short-term collateral for lenders.
3. Higher-End Models: You can afford a more luxurious model for the same price as a new, less prestigious car.

Risks of Buying Used

Lenders may shorten the loan term and increase the interest rate for bad credit car loans on used cars. However, buying from a private party can be cheaper than purchasing from a dealership.

Questions to Ask When Buying Used

• How long have you owned the vehicle?
• Has the vehicle been in an accident or repainted?
• When are the next state inspection and emissions tests due?
• How often has the oil and filter been changed?
• Why are you selling the vehicle?

Pre-Qualification and Loan Terms

Pre-Qualification

Online platforms like Buy A Auto allow you to pre-qualify for a bad credit car loan before you start shopping. Ensure you borrow enough to cover all associated costs, such as dealer prep charges, license plates, title, and registration fees.

Loan Terms

The total price of the car is more crucial than the monthly payment. Extending the loan term can lower monthly payments but will increase the total interest paid. For example, a $20,000 loan can have its monthly payments reduced from $500 to $360 by extending the term from 48 to 72 months. However, this will cost an additional $2,000 over the life of the loan, or 10% of the loan amount (source).

Interesting Stats

• Credit Scores and Car Loans: According to Experian, the average credit score for a new car loan in 2022 was 732, while for a used car loan, it was 665 (source).
• Loan Delinquencies: As of 2022, about 4.5% of auto loans were 90 days or more delinquent (source).

By understanding these factors, you can make a more informed decision when choosing between a new or used vehicle, even with bad credit.