How Credit Rating Affects Your Car Loan Rates

Bad credit car loans are available with higher interest rates. If you have bad credit, or a short credit history, you may need to seek a bad credit loan and you will need to be prepared to accept higher rates. The rate will be contingent upon the amount of risk the lender assumes by offering you a loan.

Late Payment History

Any late payment you have on your credit history within the last two years will drop your credit score and increase your car loan rate. There is a statute of limitations on past late payments that varies by state. As a general rule, it is best to assure any payment notice is at least 2 years expire. It may be possible to explain away one past due bill, but several will require more than just explaining. You will be considered a high risk borrower and penalized accordingly.  

Previous Defaults

Defaults are taken more seriously than past-due payments. Ultimately, the lender wants to ensure they will not lose money on the loan. With past-due payments, they get the money eventually, but with defaults, they may never see the funds. If you have previously been in default on a loan, you should wait at least 5 years before seeking a new car loan. You may also need to secure your new loan against an asset, typically the vehicle itself, in order to reduce the cost of financing for your new loan. 

Prior Modifications

If you have previously undergone loan modification, your credit score and new loan terms will suffer as a result. When you refinance, consolidate, settle or pay out a loan early, the lender loses money from what they originally anticipated earning on the loan. When this happens, the lender will report the modification to the credit bureaus. Future lenders will be able to see when you paid off a loan correctly and when you modified the loan. Your rates will be higher and your terms stricter after a past modification. 

Standing Bankruptcies

The worst-case scenario for a borrower is a standing bankruptcy. There is a statute of limitations on bankruptcies depending on the state where you filed. If you are within this limitation, a new lender will see the bankruptcy on your credit report. You will have to apply for a bankruptcy car loan, which will be extremely expensive and hard to attain. You may have to look for special financing through a cosigner or collateral in order to secure the loan at all.


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