What are the Consequences of a Bad Credit Car Loan?

Bad credit car loans are harder to find because the borrower is not appealing to most lenders. Lenders prefer applications from borrowers with good to perfect credit in order to reduce the risk of default on the loan. However, some lenders are willing to provide high risk car loans in order to take on the additional fees associated with these loans. If you are seeking a bad credit car loan, expect to pay more for the loan and take on additional risk.

High Fees

The number one consequence of taking on a high risk car loan is the higher interest rate you will pay. Interest rates are determined by a number of factors, but your credit score and application will be the major contributor to this percentage fee. If you have a bad credit score, your interest rate will go up significantly. On a loan of $5,000 or more paid off over 3-5 years, even a small interest rate increase can cause a significant increase of payment amount. Remember that you will be expected to pay more, in order to secure financing, if you have bad credit.

Unfavorable Terms

Lenders will want to mitigate the high risk of approval by offering a loan with high penalties. One major threat to a high risk lender is the possibility that you will refinance the loan in a few years, once your credit score increases. If you do this, the lender will make less money than they expected. To protect themselves from this, lenders introduce huge fees and penalties to bad credit car loan contracts. You will face financial consequences on any future refinances, early pay-offs or consolidations of the loan. For example, if you agreed to a contract term of three years, but pay it off in two, the lender may impose a pre-payment penalty fee of $5,000 to $10,000 dollars to recoup their expected costs.

Seizure of Collateral 

When you place collateral to secure a loan, you offer an asset in case of default on the loan. Typically this is a home, another car or a business. If you default on your loan, you will be required to forfeit that asset immediately. Do not place collateral you cannot afford to lose. Many high-risk borrowers fall into this trap because they cannot secure a loan without valuable collateral. If this is the case, wait until your credit score recovers a bit before seeking a new loan. You do not want to be homeless and car-less if you default. 

Bankruptcy

You may have to file for bankruptcy if you cannot pay off your bad credit car loan. Most individuals seeking this type of loan are already in a compromised financial position. This means they will have a high amount of debt and a low amount of equity. That formula, plus the addition of a new car loan, will place a tremendous amount of financial stress on the borrower. If you declare bankruptcy, consolidate or settle the loan, there will be consequences that last for years on your credit report.


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