Bad credit usually means a higher interest rate on auto loans, which is why you should go for the shortest loan term you can afford!

The cost of long-term loans

Unless you qualify for a new 0% interest rate car transaction, you will pay interest charges over the life of your loan. The higher your interest rate and the longer the loan, the more interest charges you will pay.

Auto loans are almost always straightforward interest loans, which means you are charged interest on the remaining loan balance. The faster you pay off the vehicle, the less interest you pay. That is why it is in the best “interest” of every borrower to choose the shortest possible loan term.

People with bad credit or no credit are generally entitled to higher interest rates. If you are getting a high interest rate, it may mean that your credit history is not the best. Not having credit is not necessarily a bad thing, but it can increase risk as a borrower. If you are a bad credit borrower with a difficult credit history, that means you will likely need a subprime lender for financing and will need to work on fixing your credit history.

Auto loans can be a great way to build or rebuild your credit if you stay up to date on payments. Plus, having a stronger credit history can help you benefit from lower interest rates in the future. Right now, however, there are ways to offset the higher interest charges you are likely to face.

Duration of your loan

It can be tempting to choose the longest possible loan term, and we don’t blame you. The longer the term of the loan, the smaller the monthly payment. It is easy to choose this option because it releases more income every month. But you can’t see the negative impact of a long term loan at first glance.

To illustrate the effects of a long-term loan, let’s use this example:

  • Auto loan amount: $ 10,000
  • Interest rate: 12%
  • Term of the loan: 84 months

With this loan you would end up paying $ 4,829 of interest, and a total of $ 14,829 for the car, although you only funded $ 10,000. The interest charge in this example is almost half of the amount you originally financed.

Now, let’s shorten this loan term:

  • Auto loan amount: $ 10,000
  • Interest rate: 12%
  • Term of the loan: 60 months

With a loan term of 60 months, you will end up paying $ 3,346 of interest, and a total of $ 13,346 for the vehicle. Simply by shortening the term of the loan, you would save $ 1,483 – about six car payments!

While the longer loan term means paying $ 46 less each month for your vehicle, it costs you well over a thousand dollars over the course of the loan. When you fund anything, you have to think long term – and stretch your loan to the maximum may mean spending extra cash over the life of the loan.

Down payments and interest charges

If you do not want to extend the term of your loan but want to reduce your monthly payment, a down payment can mean big savings in interest costs and car payments. Also, an equity swap is a great way to reduce the amount you finance and can help you meet the down payment requirement of bad credit auto lenders.

Using the same example as above, now let’s add a down payment:

  • Auto loan amount: $ 10,000
  • Interest rate: 12%
  • Term of the loan: 60 months
  • Down payment / trade-in equity: $ 2,000

With a down payment the loan amount drops to $ 8,000, your monthly car payment would be $ 178, and the total interest you will pay is $ 2,678. Combine a down payment and a longer loan term, and you can see a lot of savings!

Bad credit auto loans

While bad credit means you’ll likely only qualify for a higher interest rate, that doesn’t mean you have to settle for a huge car payment or pay thousands in additional interest charges.

Extending the term of your loan is very tempting, but it costs you more. Also, the longer the loan term, the more you have to worry about vehicle payments. The faster you pay off the car, the less you spend backwards on the loan and the sooner you’ll have one less bill to pay each month.

If you’re a bad credit borrower looking for your next car loan, we want to help. Here has Express auto loanWe know the ins and outs of auto finance because we have a nationwide network of dealerships that work with borrowers in many types of credit situations. Start here with us and complete our free auto loan application form, and we’ll look for a dealer in your area with bad credit loan options.

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