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When it comes to buying a car with bad or challenged credit there are many factors to take into consideration. For example, the payment and debt to income ratios, the loan to value, age of the car, price, etc. All of these factors affect the risk of the loan which in turn affects the interest rate, the probability that the loan will be paid back in full, and the overall chances of whether or not the loan will be approved.
When a bank decides to approve a loan, the bank will take into consideration all of the above mentioned factors in addition to credit. The lender will want to minimize the risk as much as possible and may require the consumer (you) to meet additional requirements. Such as down payment requirements, vehicle requirements, and income requirements. The object behind these requirements is to minimize the risk of the loan which will improve the chances of the loan being approved and in most cases the lowered risk will also lower the interest rate. For example, if one wishes to purchase a 2013 Ford Fusion with a $500 down payment, and a sales price of $20,000 including all fees (out the door), depending on the book value of the vehicle, this deal structure may or may not work for the lenders requirements. The lender may require an additional down payment so that the loan will fit within the loan to value requirements. If the vehicle has a book value of $15,000 and the lender loans a maximum of 115% ($15,000 X115%= $17,250), the lender would require the customer to cover the difference with a down payment, an additional $2,250. This is how the lender is able to approve your loan with challenges on your credit, and as I said earlier, this is also how the lender will determine your interest rate.
There are several lenders that specialize in loans designed specifically to help people with bad or challenged credit, and obtaining a loan through one of these lenders isn't that difficult. However, it is important to know which kind of program one will qualify for. There are several programs available but they can be broken down into three categories. Those three categories are sub-prime (bad credit), first time buyer programs (limited credit), and near prime (customers that fall in this category have some established credit along with some credit issues). As stated earlier, the overall risk determines the quality of the loan, and many things can affect the risk, but there is one sure way to bring the risk DOWN, and that one way is a down payment. A significant down payment will bring the risk down by improving the equity. The more money one can put down on a car purchase, the lower the risk of that loan, and the greater the likelihood of that loan being approved. The down payment can also affect for which program a consumer qualifies. For example, some "near prime" lenders will give you a better interest rate than a true "sub-prime" lender, but the "near prime" lender may only loan up to 115% of the book value. The "sub prime" lender may loan up to 125% of the book value, which will lower your required down payment, but your interest rate may be a higher % based off your credit and the increased loan to value (LTV). So in this case you would have 2 choices, make the additional down payment to get the loan to value in line with the lenders requirements and get the better interest rate, or make the minimum down payment with the "sub-prime" lender and pay a higher interest rate due to the higher loan to value. Going back to the statement regarding risk and down payment, this case is a perfect example of how the down payment affects the risk and which program one would qualify for based on their credit and down payment.
In conclusion, I would like to say that no single factor affects the risk of the loan more than the down payment. The down payment is the answer to "How do I buy a car with bad credit?", and it can also be the answer to "How do I get the best interest rate with bad credit?". The down payment is usually the only element that you as the customers will have total control over. One usually cannot control the age of the vehicle, book value, monthly income, or other factors, but one can truly control the down payment. Decreasing the risk, decreases the interest rate, and in turn increases the chances of one getting approved with bad credit. The down payment, the down payment, and the down payment is the most important factor off all! Please feel free to give us a call to ask any questions regarding your credit situation and current car needs at 229-567-3301.