Best Car Deals with Poor Credit

bad credit car loanAutomotive customers who have poor credit are able to get car loans much easier now than in the last couple of years.

Many car companies and their associated finance companies are opening up and approving “subprime” borrowers at a pace not seen since before the recent recession.

Car buyers with credit scores below 680 are considered “subprime” and nearly always pay a higher interest rate than “prime” borrowers. However this is an improvement over the last three years when this class of borrowers were essentially shut out altogether.

Which car companies are most likely to approve customers with bad credit?

Hyundai/Kia leads the way in lending to customers with credit scores below 680. In fact, about a third of current Hyundai/Kia loans are made for such customers.

Fiat Chrysler Group (Chrysler, Dodge, Jeep, Fiat, Ram) is next. Then General Motors (Buick, Chevrolet, Cadillac, GMC) and Ford (Ford, Lincoln) follow closely behind. The conclusion to be made here is that people with less-than-perfect credit scores would have a better chance of getting approved for a loan with an American car maker than with most foreign brands. However, Toyota and Honda are showing signs of easing credit restrictions as well. (Source: Automotive News)

If you are a potential new-car buyer with poor credit, be reminded that one of the reasons the U.S. entered a recession in 2008 was that lenders were too open to risky loans. Borrowers, who shouldn’t have been given loans, defaulted by the thousands, ruining many large finance companies and banks.

Although credit is loosening up a bit, it won’t be like the “wild west” days of pre-2008. Creditors are more cautious and borrowers are (hopefully) wiser.

What’s the catch?

To counteract the risk of lending to new-car customers with credit issues, lenders charge a higher interest rate for subprime loans. Rates are usually at least 10% APR and often higher, sometimes reaching 20%-25%. The highest rates are usually limited by state laws. Lenders often require a large down payment to reduce their financial risk if the car has to be repossessed in the future.

High interest rates create large monthly payments, which can be reduced with a down payment and by spreading out the loan to as much as 72 months (6 years). However, it is not recommended that high-interest loans be taken for such long terms for two reasons.

First, the total amount of interest that will be paid over the life of the loan will be staggering. For a $20,000 loan for 72 months at 12% APR interest, the total cost for the car will be over $28,000.

Second, unless a very large down payment is made up front, a long-term high-interest loan will almost always make the loan “upside down” (owing more that the car is worth) for practically the entire time of the loan. What’s the problem? The problem is that it will be difficult and costly to sell or trade the car during that time and, if the car is destroyed in an accident, insurance will not pay the full amount remaining on the loan, which could easily be thousands of dollars.

What’s the solution?

If you intend to shop for a new car, you should always know your latest credit score. What’s your FICO score? Find out now when you check your credit report for $1 at! If you find that your score is below 680, you should compare your dealer’s loan rate to that of local banks and credit unions. You do not have to finance through your dealer.

Understand that dealers often boost loan interest rates (for extra profit) provided by their finance company. This is called “dealer reserve” and can be 2% or higher. Try to negotiate the rate down by at least a point or two if you decide to go with dealer financing.

Also try to finance for a shorter term — less than 72 months — to reduce the overall cost of your loan. Don’t fall into the trap of assuming your credit score will improve dramatically in a year or two, and that you can refinance the loan for better rates. It probably won’t happen. Dealers often use this “trick” to talk you into a long loan.

One final piece of advice. Shop for cars with high rebates. American car brands currently have the best and highest rebates, especially for left-over models. The reason is that, with poor credit, you will not quality for 0% APR or other low-interest rates,  or for special lease deals — only rebates. Don’t let dealers tell you can’t have the rebate with bad credit.


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