Buying a car with bad credit?
If your credit score is less than 620, please read before on buying a car with bad credit to potentially save yourself thousands of dollars in interest payments. Buying a car with bad credit is one of the most expensive mistakes that you can make!
The shiny new vehicle on a dealer’s lot might look like a necessity in your eyes, but that simple purchase can end up costing you much more than the sticker price if you had bad credit. Even though the features are great and the paint is shiny, there is no feature that justifies paying an insane amount of interest on something that is going down in value.
The interest rate you receive when financing a vehicle is a highly important piece of the car buying puzzle. This is the rate that will be factored into the amount of money that you borrow to determine how much your monthly payment is and how much interest you will pay over the life of your loan. I argue that your interest rate can be more important than the purchase price when determining the total amount that the vehicle will cost you.
A Real Scenario: Buying a Car With Bad Credit
To explain this phenomenon in more detail, I’ll walk you through an example car purchase and use two different shoppers. One shopper will have great credit and qualify for a great interest rate. The other shopper will have bad credit and will only qualify for a much higher interest rate. We will look at the monthly payment, total interest paid, and total cost of the vehicle.
We will use a vehicle that is priced at $20,000. 3.99 % APR is a normal rate for a highly qualified individual and 18.00 % APR is the North Carolina state maximum interest rate. These are the two rates that we will use in this scenario.
At a $20,000 purchase price and 3.99% APR, your monthly payment is $331.01. Over the life of this loan, you pay $2,703.75 in interest and the total price of your $20,000 with taxes, fees, and interest added in is $23,832.72.
At a $20,000 purchase price and 18.00% APR, your monthly payment is $485.46. Over the life of this loan, you pay $13,824.15 in interest and the total price of your $20,000 with taxes, fees, and interest added in is $34,953.12.
This means that if you just “HAVE” to have that vehicle and have shaky credit, the same vehicle will cost you over $11,000 more than it would cost someone that has good credit. This translates into over $150.00 more a month in the car payment for the same car.
|Credit Rating||Good Credit||Bad Credit|
|Vehicle Purchase Price||$20,000||$20,000|
|Monthly Car Payment||$331.01||$485.46|
|Total Price of Vehicle||$23,832.72||$34,953.12|
Does it get worse? You bet.
Often, individuals that have less than stellar credit end up in vehicles that are not as reliable. Even if it is a newer vehicle, the overall reliability is worse or the individual vehicle previous life took a lot out of it. In this case, the new owner (with shaky credit and a sky high payment) might have to make some major repairs over the life of the six year loan.
Just imagine having to make a $485.46 car payment and pay a $500 repair bill after making 36 payments on this vehicle. At this point, you have a car that you are most likely still upside down in because the majority of your payment up to this point has been going to interest instead of principle. You have to find a way to repair the vehicle and repair it well enough that it will last for at least three more years to be paid for.
This is just a bad situation, but it is unfortunately the situation that many people willingly walk into on a daily basis.
But wait, I need a car!
Sure you do! But do you need this car? In almost every scenario, you would be better served buying a cheap car with cash, even if it’s only a $500 car until your credit has recovered. Knowingly entering into a long term loan with a high interest rate on a depreciating asset is one of the worst decisions that you could make.
A $500 car is not going to be something that is beautiful. It might even have a few problems, but by paying cash for a clunker and putting what your car payment would be into paying down your outstanding debt, investing in your future, or simply saving money for a rainy day, you can turn your life around.
The one source of financing that I can recommend for individuals buying a car with bad credit is your local Credit Union. I have seen from firsthand experience that they often look at more than just the credit score, income, and debt-to-income ratio that traditional lenders rely so heavily upon.
While you are driving your $500 car, I highly encourage you to go open a checking account at a local credit union. Start to build a relationship with a banker at the institution. This relationship can prove very valuable when you are ready to buy that next car and have taken the necessary steps to mend your credit and improve your credit score.
This simple step could save you over $10,000. Isn’t it worth a few hours of your time?
Whatever you do, whatever your credit score: think it through. Car’s depreciate. Take your time before making a purchase and make sure that whatever you are buying is the perfect vehicle for you that you can afford.
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