Are Bad Credit Loans Right for You? Here are the Pros and Cons
Perhaps you need a car loan but have been rejected by traditional banks and lenders? Or, maybe you’re concerned that applying for a car loan will negatively impact your credit score?
Fear not – you’re not alone. Research shows that 1 in 4 Australians use car loans to fund the purchase of new and used cars, with the average car loan amount equalling $33,489. These figures show that many people cannot afford the upfront cost of a car.
Unfortunately, not everyone is eligible for a traditional car loan, especially for those with bad credit. The good news? There are ways to get approved for a car loan – even if the odds are stacked against you.
Read on to learn about the pros and cons of bad credit car loans, and whether they’re worth your while.
Key Takeaways
- With a bad credit personal loan, people with low credit can be approved for a car loan, albeit with strict borrowing terms.
- Higher interest rates and fees, shorter loan terms, and lower borrowing amounts are common setbacks with bad credit car loans.
- Talking to a debt consultant, such as the friendly Debt Fix team, can explore your options and recommend a bad credit car loan that suits your needs.
What is a Bad Credit Car Loan?
A bad credit car loan is a financial product for people with poor credit. It works like a conventional car loan, in the sense that you use the loan funds to pay for the purchase of the car, but the borrowing terms are stricter. You may pay higher interest and fees, be limited by how much you can borrow, and have less time to repay the loan.
That said, a bad credit car loan is still a great choice if you need a car urgently. Depending on your circumstances, you may not need to improve your credit score before you get approved. You may benefit from a bad credit car loan if you have a credit score of 500 or lower.
What are the Pros of a Bad Credit Car Loan?
The advantages of a bad credit car loan are as follows:
Rapid Access to Car Financing
With a bad credit car loan, you can acquire the funds you need to get a new or used car, quickly and easily.
Since you don’t need to improve your credit score first, you can jump straight into the application process. If you meet the lending criteria, you may receive the necessary funds in a few days. This is especially useful if you need a car urgently, be it for work or personal reasons.
Adaptable to a Variety of Financial Situations
Whether you’re experiencing financial difficulty due to a change in your employment, accommodation, or relationship status, you may still be eligible for a bad credit car loan.
As long as you prove that you can afford the monthly repayments, your odds of being approved are high. This enables you to seek financial relief in various situations, regardless of the source of the problem.
Great Opportunity to Improve Your Credit Score
True, your credit score may not be in the best shape now, but being money smart can improve it over time.
By establishing a consistent pattern of timely repayments, your credit score will gradually increase. This will make it easier for you to apply for other financial products in the future, such as other loans and mortgages.
What are the Cons of Bad Credit Car Loans?
There are many advantages to applying for a bad credit car loan, but there are risks involved. Some of the many drawbacks to watch out for are:
High Interest Rates and Fees
Bad credit car loans are notorious for having higher interest rates and fees than conventional car loans. This is because, from the lender’s perspective, you’re a risky client to lend money to.
Due to your poor credit score, you may have a history of poor financial activity, increasing the risk of defaulting on your loan repayments.
To protect themselves from financial risk, bad credit car loan lenders may only approve you if you pay a high interest rate. This could otherwise negate the benefits of the loan itself.
Lack of Flexibility
When negotiating with banks and lenders, a low credit score doesn’t give you much leverage. Aside from high interest rates and fees, you may be subject to other unfavourable borrowing terms.
For example, you may have a shorter repayment period, such as 3 to 4 years, resulting in higher monthly instalments. This could mean less money for essentials like rent or groceries, and less for luxuries like dining out or going to the movies.
Limited Vehicle Options
Depending on the type of loan you choose, you may be limited by the age and type of car you can buy.
Since the borrowing amount for a bad credit car loan is typically lower than a conventional loan, you may have to settle for an older, used car. These cars may be less reliable than newer cars, resulting in higher ongoing maintenance costs.
What’s the Difference Between a Bad Credit Car Loan and Dealer Finance?
During your search for a car, you may be offered financing through a car dealership. This is a loan offered by car dealerships, allowing you to secure financing for your car and drive away on the same day.
Dealer financing usually has lower interest rates than bad credit car loans, but is also typically limited to new car purchases. This limits the age and type of car you can purchase. They also often come with a ‘balloon payment’, a lump sum payment that you make at the end of the loan term.
Balloon payments represent a portion of the car’s value, ranging anywhere from 5 to 20 per cent or more.
The Downsides of Dealer Financing
While a balloon payment helps lower your monthly repayment instalments, it also means having a large payment to make at the end of the loan term.
This could lull you into a false sense of security during the loan term. You may think that you have more money to spend than you actually have. That is, until the balloon payment is due.
Dealer financing is also offered on the spot by car salespeople and their finance teams. At a car dealership, you’re already stressed enough thinking about what car to buy. Adding a sudden finance option into the mix can heighten stress levels, forcing you into agreeing to unfavourable loan terms.
When you approach a company like Debt Fix, we gently guide you through the loan application process, laying it all out for you in clear, easy-to-understand terms.
We take the time to review your finances and, by leveraging our network of approved lenders, recommend bad credit car loan options that best suit your needs. This means we only suggest loan options that are affordable and favourable to you.
Best Practices to Follow When Applying for a Bad Credit Car Loan
Firstly, it’s not recommended. But if you need to apply, here are some best practices to follow:
Thoroughly Review the Loan Terms
Take the time to review the terms of your bad credit car loan. Ask for clarification on anything you’re unsure about, whether it be unfamiliar terms or phrases. If possible, have a trusted friend or relative read the document for you.
If you don’t trust in your ability to understand the terms of a bad credit loan term, then talk to a company like Debt Fix. In clear, easy-to-understand terms, we break down the complexities of financial jargon for you. This way, you’ll know exactly what to expect in terms of interest rates, fees, additional repayments, and early exit conditions.
Budget Accordingly, Agree Only to What You Can Repay
Before applying for a bad credit car loan, figure out what you can afford in monthly repayments.
Add up the money you bring in, be it income from a job, investments, or Centrelink payments. Then, subtract the money going out, be it rent or mortgage payments, utility bills, and leisurely expenses. The number you end up with is the amount that you can reasonably afford to repay each month.
Talk to the Experts
At Debt Fix, we have years of experience helping people just like you work toward a debt-free future. We understand the challenges of dealing with multiple debt accounts. We help simplify your debt repayments, making it easier for you to afford the things that make your life easier, such as a new car.
Get a New Set of Wheels With Debt Fix
Bad credit car loans do carry inherent risks – risks that other loans don’t have. But, when handled properly, they can be an effective way to get the funds you need to afford a new or used car. Let Debt Fix be your partner in financial freedom.
Frequently Asked Questions (FAQs)
Below are answers to frequently asked questions about bad credit car loans.
Do I need to improve my credit score before applying for a bad credit car loan?
You may be able to get approval for a bad credit car loan without improving your credit score. However, you may be subject to a higher interest rate.
Do I need a deposit to be approved for a bad credit car loan?
You don’t need to deposit money to be approved for a bad credit personal loan. However, having an account with money saved up could help build a case for your application.
Can I Repay a Bad Credit Car Loan Early?
Most bad credit car loan lenders let you repay your debt early. This means you can make additional repayments on top of your scheduled repayments. Whether or not you are subject to an early repayment fee depends on the loan terms.
