Getting a loan can be a challenge if you have a bad credit history but, thankfully, it is not all doom and gloom. In fact, there are plenty of bad credit car loans if you do your homework properly. For people with bad credit, loan availability is not an issue anymore – what matters is the interest rate the lender will charge.
Secured and unsecured bad credit car loans
When applying for a bad credit car loan, you could choose between secured and unsecured loans. Whatever your choice, these loans are more expensive than loans available for people with good credit, but for some people this is the only loan option available.
Secured loans are cheaper
A secured bad credit car loan is always preferable to an unsecured one because it is cheaper. For starters, most lenders will not ask for a down payment, which in most cases is the biggest headache for prospective borrowers.
Even in situations where a down payment is needed, it is usually a fraction of what you would need to pay if your loan is unsecured. Moreover, the interest rate charged on the loan is much lower but this usually depends on the collateral you offer. When you use the car you are purchasing as security, the lender is assured of getting his or her money back in the event of a default, hence the low interest rate. For this reason too, the approval rate for secured bad credit loans is much higher.
Unsecured bad credit loans
Despite their shortcomings, unsecured bad credit loans might be the only option available for your auto financing. When you look at the risk that the lender takes, it is easy to understand why a higher down payment is required and also why the interest rates are high.
The long term benefits of a bad credit loan
Secured or unsecured, a bad credit loan might not only help get you the car you desire but also help improve your credit rating.
Normally, a bad credit rating will take several years to improve, but you can change this by getting a loan. The moment you start repaying on a consistent basis, your lender will translate this as a measure of responsibility and in a very short time, you’ll see marked improvement in your credit score. Chances are that by the time you finish paying your bad credit loan your credit score will help you get cheaper loans.