Payment buyers and car loans
A payment buyer is someone who only cares about how much they spend on a monthly payment – often striving to pay the lowest possible amount each month. It may sound great in theory, but buying a car loan this way could end up costing you in the long run.
It doesn’t pay to be a payment buyer
When all you care about is getting the lowest possible monthly payment on a car loan, you usually end up stretching your loan longer than necessary. Extending the term of your loan too much could mean paying more for a vehicle than it is worth.
Indeed, the longer you have to pay for a loan, the higher the interest charges. Once interest starts accumulating, it can add thousands of dollars to the overall cost of your auto loan, especially if you’re a borrower with bad credit. Bad credit consumers generally qualify for higher than average interest rates on auto loans.
Overall costs in real terms
According to Experian State of the car finance market from the third quarter of 2020, borrowers in the non-prime, subprime, and deep subprime credit score ranges are generally eligible for interest rates between approximately 10% and 20.5%. These borrowers typically have a credit score of 660 or lower. AT Auto Express Credit, data from our dealer network indicates an average interest rate of approximately 13%.
Most loan terms for new and used car consumers, regardless of credit score, hover around 72 months on average, according to Experian. Buyers in our dealer network are generally eligible for an average loan term of 66 months. Either way, it all adds up to a recipe for large amounts of accrued interest charges.
For example: The vehicle you are financing has a list price of $24,000. You qualify for a car loan with an interest rate of 13%, a term of 60 months, and a down payment of $2,500. In this situation, you will end up paying over $7,000 in interest charges at the end of the loan. This equates to a payment of approximately $490 per month and a total loan amount of over $29,000.
Now, let’s say you really want that $24,000 vehicle, but $490 a month isn’t quite in your budget. A payment buyer can ask the lender for financing for a longer loan term to reduce the monthly payment amount. Imagine that our borrower opts for a loan term of 84 months.
Changing nothing but the term of the loan, the new monthly payment is almost $100 less, or about $392. However, the new total loan amount is almost $33,000. That’s over $11,000 in interest charges.
Save money on interest charges
Being a payment buyer means paying as little as possible each month, often for as long as possible. But since interest charges can add up quickly on a car loan, it’s best to look at the big picture and create a balance between the monthly payment and the term of the loan.
There are several ways to reduce the amount of interest charges you pay and the overall cost of your car loan:
- Use the largest down payment possible. When you’re a borrower with bad credit, you’re usually required to make a down payment on a car loan of at least $1,000 or 10% of a vehicle’s selling price. The higher the amount, the more you save in interest because a deposit is applied directly to the selling price of the car. Using the example above, the amount financed is actually $21,500 after the deposit has been deducted from the list price. If you took out the same loan without making a down payment, the loan would be over $32,000 for 60 months and over $36,000 for an 84 month loan term.
- Take out a car loan with the highest monthly payment you can comfortably afford with the shortest possible term. This helps you balance overall costs and pay off your loan faster, with as little interest as possible. Looking at the big picture and preparing your car buying budget in advance can really help.
- Pay off your car loan in advance whenever possible. The key to saving money in interest charges is to pay down your loan principal balance quickly. Most car loans these days are simple interest loans, which means that each day a small amount of interest accrues based on your loan balance. Reducing that amount even by putting in an extra $20 for each monthly payment can help save you money in the long run.
- Work on building your credit score. Even though lenders who work with borrowers with bad credit know that you are more than a credit score, the easiest way to benefit from a lower interest rate is to improve your credit as much as possible. . Simple things like paying all your bills on time and making sure your credit reports are error-free, taking out new lines of credit, or reducing your credit card balances can all make a difference.
If you can’t improve your credit score before it’s time to look for your next auto loan, don’t despair! A car loan from a subprime lender is a wonderful way to start your credit journey. Affordable options like well-maintained used vehicles and Certified Pre-Owned (CPO) cars aren’t out of reach when your credit is less than perfect.
Find a subprime lender
Not all lenders work with borrowers who have credit problems. But there’s more to subprime lenders than just your credit score to get you approved for car financing. Using qualifications such as income, employment history, residency stability, and your willingness to make a down payment, bad credit auto lenders take a holistic approach to getting you the auto loan you need.
These third-party lenders work through special financing dealerships, but they don’t always shout from the rooftops about their ability to handle customers with tarnished credit. If you’re not sure where to turn for your next car loan, let us help. AT Auto Express Credit we know how important it is to be prepared for an auto loan situation, so you don’t have to be a payment buyer!
Let us direct you to the car loan you are looking for. Simply fill out our quick and free car loan application form and we’ll get to work connecting you with a local special finance dealer. For over 20 years, we’ve been connecting consumers with the bad credit loan opportunities they need, now it’s your turn! Get started with our no-obligation process today!