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A bad credit score typically means a higher auto loan interest rate, which is exactly why you should opt for the shortest loan term you can afford!

The Cost of Long Loan Terms

Unless you qualify for a 0% interest rate new car deal, you’re going to be paying interest charges during your loan term. The higher your interest rate and the longer the loan, the more you’re going to be paying in interest charges.

Auto loans are almost always simple interest loans, meaning you’re charged interest on the remaining balance of the loan. The faster you pay off the vehicle, the less you’re charged in interest. This is why it’s in every borrower’s best “interest” to choose the shortest loan term they can afford.

People with bad credit or no credit typically qualify for higher interest rates. If you get a high interest rate, it may mean that your credit history isn’t the best. Having no credit isn’t a bad thing, necessarily, but it can make you a higher risk as a borrower. If you’re a bad credit borrower with a rocky credit history, it means you’re likely to need a subprime lender to get financed, and you’re going to need to work at repairing your credit history.

Car loans can be a great way to build or rebuild your credit if you stay current on the payments. Plus, having a stronger credit history can help you qualify for lower interest rates in the future. Right now, though, there are ways to help offset the higher interest charges you’re likely to face.

Length of Your Loan Term

It may be tempting to go with the longest loan term possible, and we don’t blame you. The longer the loan term, the smaller the monthly payment. It’s easy to choose this option because it frees up more income each month. But you may not see the negative impact of a long loan term at first glance.

To help illustrate the effects of a long loan term, let’s use this example:

  • Auto loan amount: $10,000
  • Interest rate: 12%
  • Loan term: 84 months

With this loan, you’d end up paying $4,829 in interest, and a total of $14,829 for the car, although you only financed for $10,000. The interest charges in this example equal nearly half of the amount you originally financed.

Now, let’s shorten that loan term:

  • Auto loan amount: $10,000
  • Interest rate: 12%
  • Loan term: 60 months

With a loan term of 60 months, you’d end up paying $3,346 in interest, and a total of $13,346 for the vehicle. Just by shortening the loan term, you’d be saving $1,483 – about six car payments!

While the longer loan term means paying $46 less each month for your vehicle, it costs you well over a thousand dollars over the course of the loan. When you’re financing anything, you have to think long term – and stretching your loan to the max can mean spending extra cash over the life of the loan.

Down Payments and Interest Charges

If you don’t want to extend your loan term but you’re looking to lower your monthly payment, a down payment can mean big savings in interest charges and car payments. Also, a trade-in with equity is a great way to lower the amount you’re financing and can help you meet the down payment requirement of bad credit auto lenders.

Using that same example as above, now let’s add a down payment:

  • Auto loan amount: $10,000
  • Interest rate: 12%
  • Loan term: 60 months
  • Down payment/trade-in equity: $2,000

With cash down, the loan amount drops to $8,000, your monthly car payment would be $178, and the total interest you’d pay is $2,678. Combine a down payment and a more favorable loan term, and you’re looking at a lot of savings!

Bad Credit Car Loans

While having bad credit means you’re likely to only qualify for a higher interest rate, this doesn’t mean you have to settle for an enormous car payment or pay thousands extra in interest charges.

Stretching the length of your loan term is very tempting – but it costs you more. Additionally, the longer the loan term, the more vehicle payments you have to worry about. The quicker you pay off the car, the less you spend upside down on the loan, and the sooner you’re going to have one less bill to pay each month.

If you’re a bad credit borrower and you’re looking for your next auto loan, we want to help with that. Here at Auto Credit Express, we know the ins and outs of car financing because we have a nationwide network of dealerships that work with borrowers in many types of credit situations. Start here with us and complete our free auto loan request form, and we’ll look for a dealer in your area with bad credit lending options.