Did you know that you can buy a car with bad credit? We will discuss auto loans for repossessions and how you may be eligible for financing even though you have bad credit. In addition, we will show you how to improve your credit things that impact your credit score.
In reality, most car dealerships will want to know about your credit history. In addition, they may require a credit check. However, the good news is that if you have bad credit you still may be eligible for a loan.
Auto Loans for Repossessions
Car dealerships are in the business to make money and to sell as many cars as possible. However, they not only sell cars to those with good credit, they also sell to buyers with bad credit. When you apply for bad credit financing or sub-prime auto loans at a bad credit car dealership, they take into account more than just your credit score. For instance, they look at other factors of your application, including:
- How much you earn each month
- Consistent income levels
- Your debt-to-income ratio
- Your credit history details
- How much of a down payment you are willing to put down
- The price of the vehicle purchased
When applying for auto loans for repossessions, dealers will want to know your credit history prior to lending. For example, they want to know how well you have paid debts in the past, if you were late on payments and if you can be trusted to pay them back. In addition, they will ask for proof that you have consistent income from a job. Furthermore, they may ask for pay stubs from your current job. Dealers will want to know how much debt you have compared to your income. In addition, they also factor in how much money you want to borrow and how much the car is valued.
Many people face financial setbacks which can decrease credit scores. For example, perhaps you have been part of a divorce, bankruptcy or loss of employment. Furthermore, many auto dealerships want to work with you and earn your business by extending credit.
- Missed payments
- Bad Checks
Improve Your Credit Score with Bad Credit Car Dealership Loans
One of the advantages that comes with borrowing money in auto loans for repossessions is that it can be a way to improve your credit score. In addition, you are being given a second chance to improve your credit by making steady payments to the bad credit car dealership.
Before you approach a lender, it is important to understand a little more about what credit is, what your credit score is and how you can improve your credit score.
What is Credit?
Credit is simply a loan from a bank. Your credit score is how lenders rate you based on your history with other borrowers. It is easy to forget that you are borrowing money when all you have to do is swipe your card and purchase items. However, a credit card is just a line of credit extended to a credit card user for a loan. Moreover, credit card companies are in business to make money by collecting interest on your purchases. Finally, credit card companies love it when you have a revolving balance because you pay them interest each month, year after year.
Interest Rates and Compounding Interest
The second thing to know is that banks that issue credit cards make money from users by charging the users an interest rate. In addition, credit card users carry a revolving balance on their cards each month. Furthermore, this is simply the amount of money that users owe the bank at any given time during the month. The credit card issuer uses this revolving balance value to calculate your minimum payment. It also helps them determine how much interest you will pay. Finally, your interest rate determines exactly how much you are charged each month on the balance owed.
For this example, let us say that you spent $100 on a credit card shopping spree. To simplify the example, we will assume that the interest rate charged on the card is 15%. Specifically, after the purchase, you will receive a bill from the credit card company indicating that your balance is $115 ($100 + $15 in interest). Obviously, this is an over-simplified example. But you get the picture.
Thirdly, another important concept to get is compounding interest. Consequently, compounding interest is when the interest on a balance begins to snowball and grow faster and faster over time. For example, in the above example, you accrued $15 in interest in the first month. In contrast, if you didn’t pay toward the balance, then in month number two, you would owe $115 plus 15% more interest ($115 + $17.25 = $132.25). Again, this is over-simplified to help you understand interest rates. If you miss a payment, there would also be a late fee and your interest rate might increase as well!
Monthly Payments, Minimum Payments and Fees
The third thing to know is payments and fees on credit cards. Each month, credit card users must make a payment to their credit card balance if they have a revolving balance. Moreover, this means that if you purchased something last month using your credit card, then you must pay towards that balance using real money from your bank account. Normally, the credit card company asks you to make a minimum payment. The minimum payment is usually around 2% of the revolving balance. However, in many cases, if your revolving balance is low, then a baseline minimum payment will apply. Normally, this is $25-45 each month.
When considering the basics of credit, consider that fees usually apply to credit cards. It is common for some credit cards to charge an annual fee, especially if the card advertises member benefits, such as frequent flyer miles or cash back. In addition, there are fees to penalize you for not making payments, or being late on payments. As a result, getting late payment fees can really add up and hurt you by increasing your balance, driving up your interest rate and freezing your credit line.
Credit Scores and Ratings
When discussing credit scores, there is a numerical range that most creditors use to rank borrowers. Moreover, the numerical range of credit scores is typically between 300 to 850. Specifically, a score of 300 is the lowest score and 850 is the highest credit score. Otherwise, if you have no credit history than you will not have a score. The FICO Credit Scoring model is the most common scoring system used by lenders. Obviously, if your score is low, then you will need the help of auto loans for repossessions.
Where Credit Scores Originate
It is important to know where credit scores come from. Namely, there are three (3) primary credit bureaus that track credit information.
The 3 Primary Credit Bureaus:
Consequently, these credit bureaus consolidate your credit information, such as each debt you have and the amount of money you owe. As a result, lenders use one or more of these credit bureaus to determine whether to lend money to borrowers.
There are 3 major things that you need to remember when using auto loans for repossessions:
- Always make payments on time
- Never borrow more than you are capable of paying back
- Monitor your credit score closely each month
Always Make Loan Payments on Time
One of the most powerful things that you can do when borrowing using auto loans for repossessions is to make payments on time. The credit reporting agencies track whether each payment you make on your loans, credit card, etc. are on time. If your payments are reported as late to the credit reporting bureaus it can hurt your credit score significantly. So, always make payments on time. One simple trick to make sure that payments are made on time is to have the payments automatically drafted from your bank account each month. Many auto loans for repossessions can be set up for automatic payments through your bank account.
Monitor Your Credit Score
Finally, throughout the process of learning CREDIT, you must monitor your personal credit score. There are businesses and credit cards that will provide this information for free. Moreover, there are also companies that specialize in monitoring and protecting your credit. In addition, the Federal Trade Commission (a government agency that regulated credit) can help you obtain resources for monitoring your credit.
How to Build Credit
When it comes to credit scores, you should know that building credit is slow. Accordingly, there are several things you should know about credit scores. First, you should know that it takes time to build good credit. Getting good credit can take many years. In addition, achieving an 800 or greater credit score typically takes many years.
Here are some additional tips for how to build and improve your credit along the way.
Establish a Credit History
Unfortunately, to have credit you must establish credit. When you have little or no money and you are just starting out, most lenders don’t want to lend to you. However, there are some options for you to consider. Specifically, here are some suggestions for how to build credit.
Get Started Building Credit with Small Debt like Credit Cards or Borrowing with a Cosigner
First, to start establishing a credit history you can have a friend or family member cosign a loan for you. Namely, a cosigner is someone who already has good credit and who will sign a lending contract with you. Moreover, the cosigner acts as a sort of backup or a supporter for you in the lending contract. Banks and lenders like cosigners because they have an established track record for borrowing. In addition, the lender will assess the cosigner’s credit prior to lending to you both. If, for some reason, you are unable to re-pay the loan to the lender, the cosigner is responsible for paying the remainder of the loan.
Second, you can apply for a credit card. Furthermore, many credit card companies will lend to those who have little or no credit history. Specifically, credit card companies are willing to take the risk of lending to new borrowers because the interest rates for these credit cards are typically pretty high. Of course, high credit card interest rates make lending very profitable for banks and credit card companies.
Although your first credit through a credit card or other debt will be minimal, you will have the opportunity to begin building your credit score. For example, your first debt will be like planting a seed; you must water it and take care of it for it to grow into something bigger.
Take on Healthy Levels of Debt
Most people know that when you borrow money, there is a limit to how much you can borrow. Moreover, lenders make the decision to lend to a borrower based on credit score, credit history earning power (income) and debt-to-income ratio. However, one little secret that many people don’t know is that not only can you have too much debt, but you can also have too little debt!
When you are trying to achieve a tier 1 credit score, many creditors like to see that you have some debt. In addition, creditors want to see that you are consistently making payments towards that debt. The financial industry has the expectation that most people will carry debt. People buy homes, cars and even have credit card debt. However, if you pay your debt off two quickly, it may hurt your credit score.
Pay Bills Consistently
As stated before, when you are figuring out how to build credit, you will need to consistently pay down debt over the length of the loan. For example, if you have a car payment set up for 60 months, then be sure to pay at least the minimum payment on time each month for the majority of the loan. Furthermore, don’t miss payments and be consistent. Finally, if you decide to pay off your loan a little early, that is ok too.
A Word of Warning
There are Inherent Risks with Borrowing and Debt Must Be Repaid
It’s important to understand the potential repercussions of credit cards. In fact, borrowing money is always risky business, whether it’s through a credit card, loan or line of credit. Sometimes accepting the money seems harmless. Furthermore, you may be exacerbating your financial problems by taking on more debt. In short, heed the warning that debt must be paid back, including interest on a time schedule.
In addition, understand that borrowing money can place pressure on your assets with liens or other legal instruments. Consequently, in the event that you are unable to make your payments, the lender can take your asset, such as a home or car. When you borrow more money, you also take on more financial risk and stress.
Wrap Up: Auto Loans for Repossessions
Hopefully this article has helped you understand how auto loans for repossessions can help those with bad credit. In addition, we have laid out some information about personal finance, banking and credit. Partnering with dealerships who offer auto loans for repossessions can help you get back on the right financial track if you have the discipline to follow through.
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