Auto Loans for Bad Credit Consumers: 3 Reasons to Be Happy You Don’t Qualify

Auto loans for bad credit consumers are plentiful, believe it or not. If you have a job – even if you have a low FICO (credit) score, you can get a car loan. But, this should make you happy. As a matter of fact, it should make you very wary.

Auto Loans and Bad Credit: Why You Shouldn’t Even “Go There!”

1. Auto Loans and Bad Credit: The Low FICO Score. If you have bad credit, it most likely is that way for a reason – one that’s not due to life catastrophes like a grave illness where you incur medical bills.  It’s most likely because you never learned how to responsibly handle money.

Don’t worry, you’re not alone. America has one of the most debt-ridden societies; we don’t know how to save money. In fact, most of us have never been taught about money so we keep making the same mistakes over and over again.

If you haven’t fixed the root of the problem (eg, how to effectively handle money), you shouldn’t be going into debt – period.

Moral of this story: Auto loans and bad credit should never mix.

2. Auto Loans and Bad Credit: Paying Out the Wazoo! If you have bad credit and apply for an auto loan, you’ll pay more – much more – than someone with good credit.

Let’s do some simple calculations using an auto loan calculator from Bankrate.

Auto Loan: Bad Credit

Let’s say you have bad credit and you buy a $10,000 car. Your interest rate can approach 30% (this is not a joke). Proof? This answer was given by on Yahoo! Answers from someone who works at a car dealership, ie:

i work at a dealership and i’d say anything under 10% is pretty good. we do offer 0% to those who qualify with good credit. i know someone who has a 23% rate (emphasis added) with a poor credit score which is very bad!

For illustrative purposes, let’s say that your credit score is 550 and you get really lucky and get a 20% interest rate (and believe me, this is generous). And, since most car dealers give consuemrs with bad credit 3-4 years to pay off a car loan (not the 6 years those with good credit can get), let’s say you have 4 years (48 months) to pay it off.

Now, let’s answer the following questions:

 

 

If you use this auto loan calculator from Bankrate, and plug in the numbers, what you’ll find is that your monthly payment will be $304.30, and you will have paid $14,606.40.

Auto Loan: Good Credit

Now, let’s see what these figures would look like if you had good credit.

For illustrative purposes here, the credit score is 750 and the loan rate is 7%. Where did we get this rate? Bankrate.com used car interest rates (they track averages on a daily basis).

If you use this auto loan calculator from Bankrate, and plug in the numbers, what you’ll find is that your monthly payment will be $239.46, and you will have paid $11,494.08.

Monthly difference: $64.84 ($304.30 minus $239.46)

Total Payoff Difference: $3,112.32 ($14,606.40 minus $11,494.08)

And this is real folks!

Your Bad Credit Just Cost You Almost $23,000

If you’re thinking, well, that’s no so bad. Consider this: Take the difference you paid on the car ($3,112.32) and invest it for 25 years, averaging a return of just 8% (FYI, the stock market returns an average of 10-12 per year, so this is low). Guess how much that $3,000 would grow to be?

$22,989.70. What this means is, if you invest a measly $65 per month for 25 years, even at a low market return rate of 8%, you’ll have almost $23,000.

This is how the rich (or those with financial sense) get richer, and the poor stay poor.

3. Auto Loans and Bad Credit: Committing Financial Suicide. Auto loans for bad credit consumers is financial suicide. They keep you in a cycle of debt that’s hard to climb out of. Proof? Consider this:

According to an article in the 6/22/06 issue of the Ft. Lauderdale Sun Sentinel, a third of car loans in America are for a six-year term, with an average interest rate of 9.69%. The average price of the vehicle purchased was [in my mind a whopping] $26,000.

Over the course of the six-year loan period, the car buyer pays $33,000 [for a car whose sticker price was $26,000, remember?].

The average monthly payment is $475.

And, who much is the $26,000 car the consumer paid $33,000 for at the end of the six years? A whopping [or better yet, pithy] . . . $6,000.

Would you invest in stocks that gave you this kind of return?

Further proof that auto loans for bad credit consumers is financial suicide.

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