The Guaranteed Bad Credit Auto Loan -- No Free Lunch

A guaranteed bad credit auto loan may not be what you think it is in terms of its guarantee. Being able to obtain a guaranteed bad credit auto loan may be beneficial to some borrowers in need of financing for a new or used auto. The loan however has terms and conditions that are more costly than a traditional loan and could end up costing the borrower more in the long run.

Guaranteed Bad Credit Auto Loan

A guaranteed bad credit auto loan may promise to provide financing to all borrowers regardless of their prior credit. This promise may provide immediate relief to an individual with bad credit by offering them an opportunity to rebuild credit and obtain a needed vehicle. The flip side to this offer is the interest rate, fees and other costs associated with the loan are much higher than the gong rates being offered for similar loans.

Interest Rate

A guaranteed bad credit auto loan lender will charge an interest rate that is 2 to 3 times higher than other auto loan rates. This higher rate, within the maximum loan rate permitted under a state’s law is designed to protect the lender against the risk of loan default. Since there exists a higher loan default rate for individuals with bad credit, charging an interest rate in excess of the going interest rate protects the interest of the lender.

For example, a borrower who pays 5 percent simple interest on $1,000 borrowed adds $50 to the cost of the loan. A borrower who pays 20 percent simple interest on the same $1,000 borrowed increased their cost by 400 percent. This different is the cost of doing business for borrowers with bad credit.

Review Credit Report

A borrower should review their credit report and request adjustments and changes be made when erroneous items are uncovered. The better the credit rating the borrower has, the better terms they will be able to achieve from a lender. This will allow a person with bad credit to seek more conventional lending opportunities and not have to rely solely on a guaranteed bad credit auto loan for financing their auto purchase.

A borrower should also seek credit counseling and restructuring as a way to improve their credit situation and qualify for a conventional auto loan. The borrower that goes through the process to improve their credit situation may be able to obtain a better loan and terms that are lower than what is offered through a guaranteed lender.

 


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