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Bad Credit Auto Loan: Lower Monthly Payment May Not Be The Best Option |
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You should never make the mistake of taking a bad credit auto loan for a longer period of time with the temptation of having a lower monthly payment. If you do so, you might feel happy that you don't have to pay much every month, but you will be paying a higher amount of interest and this won't be your best option. So, you should try to payoff your bad credit auto loan quickly and save money by paying less interest. There are many disadvantages to this type of financing. Many dealers might allow you to finance for 72 months or longer but this will not be a financially sound decision. Experts in this field recommend that you should finance for 48 months and never any longer than 60 months. You should realize that the longer the period of the loan, the more you would pay. As such you should try to finance for the shortest period of time to ensure that you pay the lowest total amount of interest. In addition, when the term of loan is longer, the interest rate will also be higher. The following example will clarify the difference in your total payback for a bad credit auto loan. Assuming your car loan is for $25,000, your monthly payments will be $585, $485, and $420 for 48 months, 60 months, and 72 months, respectively. The interest paid by you on lower monthly payment will be higher than the higher monthly payment. The interest for 48 months is $3,127, for 60 months is $4,138 and for 72 months is $5,257, respectively. You should also guard yourself against falling in an upside down bad credit auto loan situation, wherein you owe more on the car than it is worth. You will stand to lose a lot of money if you decide to sell the car or if you are in an accident and the car is totaled. You should try to put down a sizable down payment to avoid getting into an upside down bad credit auto loan from the very first day, as a new car generally loses 15-20% of its value as soon as it is driven off the dealer's lot. As per the advice of experts in this field, you can avoid getting into such a situation by making a down payment of at least 20% and you should also finance your bad credit auto loan for the shortest term possible. By following these tips, you can reduce the risk of an upside down bad credit auto loan. It is not wise to lower the monthly payment on your bad credit auto loan as doing so will naturally increase the term of the loan and you will find that the amount of interest that you will pay over the life of the bad credit auto loan will be very high. Moreover, you should find out how quickly your vehicle will depreciate by looking at the difference in price between the used and new vehicle of your choice. If you decide to sell before you pay off your bad credit auto loan, it will make a big difference financially if you ascertain which car will hold its value better than others. On the other hand, you should not over stretch yourself in making higher monthly payments just to avoid extra interest payments. You should try to be comfortable in making your car payments. It is more important to keep your credit rating in tact than trying to avoid an upside down bad credit auto loan and trying to save money, which also is important. It will be obvious to you that you should look for a less expensive vehicle if you can only afford your car by stretching the bad credit auto loan out for more than sixty months. A lower monthly payment against your bad credit auto loan means stretching the loan term and that means paying out more interest for the loan. This is not the best option. You should try to pay off your bad credit auto loan quickly and save money by paying less interest. |
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