Bad credit car loans

Bad credit? You still deserve a car, and here are the loans that can get you on the road

If you have a bad credit rating, receiving approval for a loan for a car doesn’t have to be difficult. There are options available to help you drive away in the brand new car of your dreams.

Some lenders deal specifically with bad credit car loans and help people with bad credit finance the purchase of a new car. These providers take on a risk to approve loans for people with bad credit because they’ve previously handled them and specialise in this area.

Two fundamental differences set bad credit car loans apart from regular car loans:

  • Bad credit car loans typically have a higher interest rate than regular loans, and often have higher fees also.
  • Bad credit car loans sometimes require more security, such as a guarantor. Lenders see customers with bad credit as high-risk, so they need extra security to justify the risk in lending you the money.
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Bad credit commodoreWhat you need to know (and ask) about bad credit car loans

Buying a car is one of the most significant purchases you’re likely to make, so shop around to make sure you get the best deal. Before you apply for any loan, find out as much as you can about the offer. Here are some things you need to look at before you proceed:

What is the interest rate?

The interest rate the lender charges for the loan affects how much your repayments are. Always find out what rate the provider is offering, and take time to compare it against other car loans to be sure it is competitive. Car loans can be secured or unsecured. Secured refers to the lender using your car as a guarantee for the loan, therefore the rate is typically lower.

What is the term of your loan?

Loan terms can be as short as 12 months or up to 5 years (more with some lenders). A shorter loan term can reduce the amount of interest you pay on your loan overall and get you out of debt quicker, but it increases the cost of your monthly repayments.

On the other hand, choosing a longer loan term reduces your monthly payments but increases the amount of interest you end up paying. Plus, it takes you longer to pay off the debt. Choose a loan term that suits your income and is in line with your financial plans and obligations.

What is the minimum repayment you’ll make?

What is the minimum repayment and is it affordable on your income and budget?

Can you make extra repayments?

Is it possible to make extra repayments on your loan at any time? This flexibility can help you get out of debt more quickly. You can also check if you can nominate to make extra payments as part of your regular repayment agreement. For example, you might decide to pay an additional $100 per fortnight on top of the minimum amount and have this total amount direct debited from your bank account every two weeks.

What kind of loan fees does the lender charge on a bad credit car loan?

Some lenders charge a monthly account fee or administration fee on its bad credit car loans, which may typically range from $5 to $15 per month. Many also charge an establishment fee to initiate your loan, and this fee can be as little as $100 or as high as $600, (or more).

Finally, some loans also include a fee if you repay any or all of it before the agreed loan term date. If you intend to make extra repayments to pay off your debt sooner, check how much the lender charges. You want a loan that doesn’t penalise you for paying it off early; otherwise, the fees can add up and significantly increase how much you pay over the term of the loan.

Do you need to take out car insurance?

As the lender is using your car as security for your loan, they may stipulate that the vehicle must be appropriately insured until you fully repay the loan.

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What you should avoid with your bad credit car loan

Unfortunately, this area of the financial world is a breeding ground for dodgy lenders who sometimes engage in unethical practices. Make sure you know what you’re getting into before you sign up for a bad credit car loan. If you don’t do your research, you could find yourself in the midst of a financial nightmare.

Examine and compare what each lender is going to provide you with:

  • How much money are you borrowing?
  • What is the interest rate on the loan?
  • What fees and costs are attached to the loan?
  • How much money do you have to repay each month? Can you pay off extra without incurring hidden fees?
  • What is the duration of the loan?

Do your sums to work out how much money you’ll pay back over a year, then compare this to the base value of the car you are buying. This comparison should give you an idea of what you are going to pay and how much you are going to spend on the vehicle. Is it worth it and, more importantly, can you afford it?

There are other steps you can take to avoid getting caught out by a dishonest lender. Check review sites, where other consumers rate the performance of car loan providers; peruse discussion boards on car sales websites and car enthusiast sites to see what other people have to say about specific lenders, or ask the advice of people you know who’ve been in a similar position when financing a car purchase.

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Alternatives to bad credit car loans

If a bad credit car loan isn’t the right choice for you, there are other options to consider. For example, you could use a credit card to buy a car. The ideal way to pay for a car purchase is to use a low-interest rate credit card or 0% offer, which lets you pay off the balance gradually without the hefty charges associated with a regular credit card or personal loan.

Another way to avoid going down the bad credit car loan route is to wait until the bad marks on your credit file have expired. You can also work to improve your credit rating, by controlling your debt and managing your finances responsibly. Also, by knowing the information on your credit file, you can work to remove any errors or disputes.

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Those niggling questions about bad credit car loans

Is a bad credit car loan the right solution for me?

Several factors affect this, from your credit rating to the type and cost of the car you are looking to buy. Compare several products before signing on for a loan, and don’t neglect other alternatives such as using a credit card to pay for a car.

How do I choose a lender that is reputable?

Do your research. Go online and see what other people are saying about their experiences with different lenders on forums, discussion boards and review sites. Talk to people you know who have applied for bad credit car loans. Which lender did they choose and was the process a success? Finally, make sure you read all the terms and conditions and shop around for the best deal.

What fees does the lender have that might be different to bigger banks?

Monthly account fees and establishment fees can significantly increase the amount you have to repay. Some loans also include a charge for early repayment, so make sure you understand all its ins and outs.

What if things go wrong and I can’t pay?

If you can’t resolve a problem with your credit provider, take your complaint to the provider’s independent dispute resolution scheme. You can contact the Insurance & Financial Service Ombudsman (IFSO) on 0800 888 202 or Financial Services Complaints Ltd (FSCL) on 0800 347 257.

If you think a credit provider has acted unlawfully or in a misleading way, you can make a complaint to the Financial Markets Authority (FMA) using its online form or call FMA’s complaints line on 0800 434 566.

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