If you have bad credit and need a car, there are plenty of legitimate ways to get an auto loan. Guaranteed auto loan dealerships might sound like a good idea, but there are a few reasons why you’ll want to avoid them.
What is a guaranteed auto loan?
Some dealerships offer people with bad credit a “buy here pay here” method of payment (BHPH). In other words, the dealership finances the vehicle rather than setting up a loan with an auto lender.
It sounds like a great opportunity for buyers, but there are some serious drawbacks to consider.
1. Doesn’t help you build credit
Guaranteed auto loan dealerships typically don’t report any of your payments to the three national credit bureaus. A customer could make payments on time for years, and never improve their credit score.
As a result, you remain stuck in the cycle of poor credit, which means it’ll still be difficult to borrow in the future. There are, of course, some exceptions, so make sure to ask before you start car shopping.
A custotrmer could make payments on time for years, and never improve their credit score”
2. Charges high interest rates
Bad-credit loans charge higher interest rates, but guaranteed credit approval car dealerships usually charge even higher than the typical bad-credit auto lender. That’s because the dealership doesn’t have the same kind of loan portfolio as an established lender to diversify and lower its overall risk.
Plus, the financing terms might not be as generous as you can get with a conventional bad-auto loan. For example, you may only get a year or two to pay off the loan.
3. Requires a down payment
With a conventional auto loan, you can typically get financing without a down payment. Guaranteed auto loan dealerships, on the other hand, always require one.
The amount required varies based on a number of factors, such as credit score, time at a job, time at residence, the presence of a checking account, and the individual vehicle’s mileage and year. You can satisfy the down payment with cash, a trade-in, or a combination of both.
4. Limited options
Guaranteed auto loan dealerships offer only older cars with high mileage. If you’re looking for a cheap car, that might not be an issue. But if you’re looking for something more reliable, you’re out of luck. Older cars are also more likely to be lemons
5. No warranty
When you’re buying a used car, it’s always good to at least have the opportunity to buy an extended car warranty in case something goes wrong. This can be a win-win for customers and dealerships. Customers who can’t afford to fix their vehicle, won’t continue to make the payments.
Some alternatives to guaranteed auto loan dealerships
If your credit is awful, you still have options to consider that can help you get a reasonable interest rate and credit bureau reporting.
The following lenders are just a few examples of companies that work with people with bad credit:
To make sure you get the best terms, start shopping around and comparing interest rates before you head to the dealership.
Many bad-credit auto lenders offer what’s called direct lending, which means that you can get pre-approved for a loan before you choose your car.
Not only does this allow you to choose who you want to work with and the terms of the loan, but getting pre-approved in advance can also act as a bargaining chip when you start negotiating with the dealership.
Use SuperMoney’s auto loan engine to get pre-approved and receive personalized loan offers from various lenders.
Use a bad-credit auto loan to rebuild credit
As with any loan, it’s important to borrow responsibly with your auto loan. Avoid taking out a loan if you know you can’t repay it. And once the loan is in place, be sure to make on-time payments every month. One way to ensure this is by setting up automatic payments from your checking account.
By doing this, you can use your loan to improve your credit. Over time, you can rebuild your credit to a point where you can now qualify for better interest rates and have more options. As you do so, you’ll set yourself up for a better financial future.
If you already have an auto loan, consider an auto loan refinance. You will be surprised how much you can save on you monthly payments and overall cost of your loan.
Ben Luthi is a personal finance writer and a credit cards expert who loves helping consumers and business owners make better financial decisions. His work has been featured in Time, MarketWatch, Yahoo! Finance, U.S. News & World Report, CNBC, Success Magazine, USA Today, The Huffington Post and many more.