Whether you plan on buying a new or used car, saving up for a new set of wheels can be challenging. That’s why around 14 percent of Australians have a car loan.
But for people with bad credit, applying for a car loan can be risky. Why? For one, they are more likely to be rejected by lenders, which, in turn, puts a bad mark on their credit score. And secondly, they are more likely to be hit with high interest rates and fees, increasing the risk of sinking further into debt.
There are also a lot of myths about people on bad credit who apply for car loans. Some say bad credit means a lifetime of loan rejections; others say it’s possible to get a loan … without being subject to a credit report check. Interesting, sure. But is there any truth to these claims? Read on to find out.
- A bad credit car loan is a type of car loan for people with bad credit. They are typically given out to people who do not meet the criteria for a standard car loan.
- There are many myths associated with bad credit car loans. Some of these myths reinforce the false idea that, for people with bad credit, they will never be approved for a loan. Or that they will face an uphill battle trying.
- On the contrary, being approved for a loan on bad credit is easier than you think. And by meeting your repayment obligations, you can even improve your credit score.
What is a bad credit car loan?
Put simply, a bad credit car loan is just like a standard car loan, but with stricter borrowing conditions. They are typically given to people with bad credit, a bad history of responsible debt repayment. Through the eyes of lenders, these kinds of borrowers are at a greater risk of debt default (breaching the terms of their debt agreement, such as the non-payment or late payment of interest).
To reduce the level of risk, lenders that offer bad credit car loans do so under stricter terms than a standard car loan. They may charge higher interest and fees. Or they may use the car, that the borrower purchased with the loan, as security. Hence, if the borrower defaults on their debt, then the car is repossessed.
What are 5 common myths associated with bad credit car loans?
There are many myths associated with car loans and people with bad credit. Many are convinced they will never get a loan due to their bad credit. Others believe they will sink further into debt if they get a loan. Let’s take a closer look at these myths, and find out if they stand up to scrutiny.
Myth 1 – You cannot be approved for a car loan on bad credit
Having a low credit score may not be the best start to your lending journey. But it’s not the end.
Although you may be denied a loan from the major banks and lenders, there are other licensed, trustworthy, and reputable lenders out there. These lenders specialise in helping people with bad credit get approved for a loan and buy the car that they need to get more done in life.
Bad credit car loan lenders also consider factors outside of your credit score, such as employment history and income, to determine your suitability for a loan. This may increase your odds of being approved even if you don’t have the best credit score.
Myth 2 – You can be approved for a bad credit loan without a credit report
Wouldn’t it be nice to be approved for a loan with no strings attached? Sure. But it’s not possible in Australia. That’s because Australian lenders must comply with the responsible lending requirements in Chapter 3 of the National Consumer Credit Protection Act 2009.
Under the act, lenders (credit licensees) must not:
- enter into a credit contract with a consumer,
- propose a credit contract, or
- help a consumer apply for a credit contract …
… if the credit contract is deemed unsuitable for the consumer. Therefore, Australian lenders must assess your suitability for a loan before they can approve you. And that means a thorough review of your credit report.
Myth 3 – You cannot consolidate a bad credit car loan
If you already have one ore more debts to your name, then you may not wish to add another to the pile. After all, it will just become another debt to pay off, another repayment date to keep track of. And you can’t even consolidate your debts if you have bad credit … right?
Wrong! You absolutely can consolidate a bad credit car loan with other debts. Debt consolidation is an effective way to simplify your debt repayments. By combining multiple debt amounts into one repayment, you don’t have to worry about paying off multiple debts to different companies several times a month.
Instead, you only make a single, fixed monthly payment. The money goes to your debt consolidation agency, who then pays the correct owed amounts to your debtors. You may also be able to lower the amount of interest you pay, and negotiate for more flexible terms, such as smaller monthly payments and a longer debt repayment period.
Myth 4 – You can afford to pay off any approved loan
Just because you have been approved for a loan, that doesn’t mean you can automatically afford to pay it off.
Sure, the lender may have done their due diligence, ensuring that you meet your minimum debt repayment obligations. But those calculations are often done under a ‘best case’ scenario. They may not account for major personal and professional changes, such as loss of employment, change of marital status, and health scares.
For these reasons, it is important to consider the advice and opinions of your lender, but also consider your own personal circumstances. Do your own calculations. Ensure you can comfortably afford the minimum debt repayment amounts on a consistent basis. But also, ensure that you can still build up your savings over time, so that you have leftover money if you need it.
Myth 5 – Getting a loan will not improve your credit score
If you’ve had past bad experiences with loans, then you may be under the impression that a loan can only sink your credit score. And while falling behind on your loan repayments can negatively impact your credit score, the opposite is true as well.
Making frequent, positive financial decisions – e.g. paying debt repayments on time – can in fact improve your credit score over time. This is known as Comprehensive Credit Reporting (CCR), and it helps lenders and credit providers gain a clearer picture of your credit history. So, even if the state of your credit report is less-than-ideal now, agreeing to a loan and meeting your repayment obligations can help turn things around.
This can benefit you in the future when you apply for more loans, such as to buy a house. When doing so, your credit report will reflect favourably on the steps that you took to pay off your bad credit car loan. In turn, this may make it easier for you to be approved for future loans, and benefit from lower interest rates and fees.
Talk to Debt Fix about bad credit car loans
Buying a new or used car is an exciting moment. But also nerve-wracking depending on your financial circumstances. If you lack the necessary funds to buy upfront and you have a bad credit score, then applying for a loan can be daunting – especially if you have other debts piling up.
If you are currently struggling with debt or have been rejected for a car loan, talk to Debt Fix. Simply share your details by completing our simple online questionnaire. One of our friendly consultants will then discuss your situation. Your free assessment is 100% confidential and will not affect your credit score.
Get started today!