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Availing Auto Loans for People with Poor Credit

Availing Auto Loans for People with Poor Credit

People with poor credit may face a number of obstacles while availing auto loans, as they are considered risky borrowers, who have a higher probability of defaulting on car loans.
Aparna Iyer
A good credit score is indispensable for people desirous of availing a loan. Every person has 3 credit scores supplied by the 3 credit bureaus, viz. Experian, Equifax, and TransUnion, that use a statistical credit scoring model for computing credit scores. The first credit scoring model was developed by Fair Isaac Corporation (FICO).
Today, bureaus use different credit scoring systems, nevertheless, FICO scores have become synonymous with credit scores. As a rule, a FICO score of 620 or less results in the consumer being classified as sub-prime. Such a person will face considerable difficulties while availing auto loans. Poor credit poses an increased risk to the lender, since these individuals may be unable to make good their financial commitments. This is on account of the lack of credit worthiness as measured by the FICO scores.
Characteristics of Auto Loans for People with Poor Credit
As mentioned earlier, people with less than satisfactory credit scores will be forced to avail poor credit auto loans. All such car loans have the following characteristics.
Rate of Interest
Individuals with poor credit scores cannot hope to avail a loan at the prime rate of interest. In other words, the interest rate on such auto loans will be substantially higher than the rate of interest charged on loans sanctioned to prime borrowers. One must remember that interest rates are a function of the borrower's credit score, the current state of the economy, and competition among peers. Hence, it's possible to shop around for the best rate despite having poor credit scores.
Down Payment
Such people are required to make a larger down payment for availing car loans as against people with good credit scores. This is because a larger down payment implies a smaller loan thus reducing the risk to the lender.
Repayment Period
People with poor credit scores are expected to repay the auto loan in 24 to 48 installments, whereas good credit scores enable borrowers to borrow for a period of 60 months or so. In other words, a shorter repayment period is usually the norm, since the lender is hesitant about sanctioning the loan for a longer duration.
Monthly Payments
The monthly repayments or the auto loan amortization schedule is influenced by the aforementioned factors. Typically, a high rate of interest and a short repayment period results in large monthly payments, while a large down payment reduces the required repayments. However, a borrower with a poor credit score generally has an unfavorable amortization schedule, since the monthly payments are high because of the inability to make a large down payment.
Tips for Availing Bad Credit Auto Loans
The following tips may help people who have poor credit avail a car loan at a reasonable rate of interest and for a considerable length of time. The amount of customary down payment may also be reduced significantly.
Co-signer
People with poor or no credit history should try and have their parents, their spouse, or their friend co-sign for them. A co-signer undertakes the responsibility of repaying the borrowed sum in case the borrower defaults on the loan. Having a co-signer may be especially useful for a student, since the latter usually has no credit history and availing a loan and adhering to the repayment schedule may be the best way of building credit scores and credit history.
Secured Loan
Obtaining a secured car loan may be a good option for a borrower who has poor credit scores but has collateral to pledge. It's important to note that the collateral may be repossessed by the lender in case the borrower is unable to repay the loan.
Leasing a car may not be a bad option for people who need a mode of transportation, have a steady income, have poor credit scores, and are unable to make the requisite down payment. Leasing requires the borrower to pay a regular rent for the use of the car.
It's evident that availing auto loans for people with poor credit is not an easy task. It may not be a bad idea to get pre-approved for a car loan. Getting pre-approved refers to meeting a loan officer or filling out an online application form that will be reviewed by the officer, who also goes through the credit report of the borrower. He then provides a pre-approval letter stating the maximum amount that can be sanctioned to the latter.