Bad credit auto loan ads have flooded the interent, television, and radio. They make you believe that anyone can buy a car, no matter what their credit. Most of these ads are based on truth, however there are some pitfalls of bad credit auto loans you should be aware of.
Bad credit auto loans work just like good credit loans do, except when you have bad credit, you are expected to put a larger down payment down, and you get a higher interest rate. However, a lot of lenders won't give loans to those with bad credit at all. Depending on how bad your credit is, down payments for these loans can range from 20% to 50% and depending on the credit and legal limits of the state one lives in, interest rates can range from 5% to 26%. There are even some extreme cases where borrowers already owning cars use their vehicles as collateral for very short term loans. The effective interest rate can be as much as 143% per year. These loans, sometimes called title loans, offer a short-term loan at 11% per month, if the loan can't be paid off in one month, than the loan rolls over to the next month at another 11%. These types of loans are illegal in most states, and even in those states where it is legal it isn't a good idea for a borrower to take out such loans. Those with bad credit should expect to pay 7-18% interest on their loan. Amortization (the time needed to pay the loan in full if all regular payments are made) choices only range from 2 to 4 years for those with bad credit, opposed to good credit borrowers whose auto loans may extend for as long as 5 to 7 years. Bad Credit borrowers can expect to pay more for each payment than those with good credit. An added bonus to your loan is that if you can pay your monthly installments on time, this will boost your credit score. So if you need another loan in the future, it will be easier to get after you pay off your auto loan.
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