Consumers with good credit save money by qualifying for low-interest car loans. Though bad credit borrowers face higher interest rates, there are still ways for them to save money. In most cases, a consumer cannot comparison shop for bad credit auto financing interest rates. However, there is a way to reduce the amount of interest paid.
Shortening the term of the loan is the easiest way to decrease interest expenses. This increases the monthly payment, while lowering the total amount of interest. In many cases where the term is shortened from 60 to 48 months, the monthly payment increases by only a few dollars per day. The amount of interest paid over the term of the loan, on the other hand, decreases substantially.
An added benefit of shortening the term of the car loan is a reduction in the period that the auto has a lower value than the loan payoff amount. If the individual plans to trade the car in for another vehicle in two or three years, the trade-in will have less negative equity. In some cases, the car buyer has even equity and will not need to pay anything toward the loan balance on the trade-in.
A car loan is recommended over a buy-here, pay-here car lot arrangement because the financing is reported to the major credit bureaus. When borrowers make their monthly installment payments on the loan, their credit score is impacted. Their on-time payments are eventually rewarded with a higher credit rating and future car loans featuring a lower interest rate.
Even if bad credit auto financing is the only option, the result can still be positive. Whenever this is used, car buyers should take the shortest loan term that is affordable. They will pay less interest, shorten the period where the car value is lower than the loan balance, and rebuild their credit score by making timely payments.
