Do you remember that whole “permanent record” thing with which teachers threatened kids back in school? Turns out it really exists, though not in the way it was wielded in the academic environment. Rather, it’s a real life disciplinary tool that can have a profound effect upon the quality of life you enjoy.
We’re talking about your credit history and the score it earns you. Great credit makes the world your oyster; poor credit subjects you to added costs for practically everything you need, including transportation.
Here’s why bad credit car loans cost more.
The Risk Factor
Lenders take a risk every time they agree to provide a loan. To gauge the degree of jeopardy working with a given individual entails, they consult the borrower’s credit history. This allows them to consider the person’s track record when it comes to repayment.
If your credit history indicates loaning you money is a low risk proposition, lenders are willing to offer you a loan at a lower interest rate. They believe they can count on you to either take the loan to its full term, or pay it off early. Either way, they’ll be better positioned to put their capital back into circulation.
When the opposite is true, they’ll hedge their bet by trying to extract as much cash as possible from the deal before the borrower defaults.
Essentially, the lower your credit score the higher your interest rate and the more expensive your loan will be as a result. In fact, in some cases, when automakers need to move cars, buyers with excellent credit can get loans from them with no interest at all.
How Much More Costly Could It Be?
Let’s say you’ve found a new car you like. The price is $25,000, you have a 20 percent down payment of $5,000 and you decide to get a fixed interest rate loan for three years. The following table will give you an idea of how much more expensive the loan could be, based upon your credit score.
As you can see, excellent credit can mean no interest payments at all, while bad credit means the loan will be considerably more expensive. However, once you’ve had the car for a year or so — and paid on time every time — you can refinance bad credit car loans with a company like RoadLoans to get a more favorable interest rate.
Why People Have Low Credit Scores
When most people think of bad credit, they envision someone who has been irresponsible with money. While this is indeed one cause of the malady, there are many others.
Sometimes it’s just plain bad luck.
Many Americans are just one or two paychecks away from financial calamity. An extended illness, a long period of unemployment or a huge unexpected expense can have a devastating effect on a family’s financial situation.
Young people just out of school may have limited credit histories, which can also drag a credit score down. Student loan debt can be another factor, particularly if the outstanding balance far exceeds the capacity of the borrower’s income to absorb it when they submit a loan application.
In other words, bad credit doesn’t always mean “bad person”. Sometimes it can mean bad situation too. And, although this is why bad credit car loans cost more, it doesn’t mean a borrower will always have a low credit score.