Poor credit car loan
Credit is the persons debts paying capability. It can be either good or bad. Today Good credit is an essential part of life of all. With the advent of Credit Cards, people have started buying a number of items on credit like refrigerator, car, water cooler, and list is unending. The reason could be as simple as willingness to buy now and pay later as this helps them satisfy their demands faster. Thus, the need for good credit is highlighted. This has also given origin to a number of Credit Rating companies.
In such a scenario, the question arises is that how many people have good credit and how many have bad credit? What about the status of those who have bad credit, especially as it takes a long time and an immense amount of patience to repair bad credit?
The banks do not grant loans to borrowers if a person has bad credit. They do not consider the reason of such bad credit. It happens in many cases that a person has genuine financial crisis that stay for a short duration of time. In such cases, there are a number of companies that consider that it is not correct to restrict a person from obtaining a car based on his past history. They consider his future loan repayment capabilities and grant loan. They secure themselves regarding collection of funds from such borrower in time by taking additional security, charging higher interest rate, and etc.
Pre- requirements for obtaining such credit:
It is easy to get a credit of a person has a good credit from any financial institution. However, when the person has bad credit, he may have to satisfy following additional steps to obtain credit:
1. Obtain a credit report:
The credit report assigning rating to the credit worthiness of the person is a pre requisite for obtaining loans. The factors like longer duration of track record, genuine reasons for delayed payment, unexpected outflow of cash and like will support the reasons for bad credit and fetch you favorable points in the credit rating report.
2. Guarantee/ surety:
The borrower with bad credit may have to bring a genuine guarantor or surety for the credit taken. This can be a compulsory pre requirement for obtaining loan for a valid institution.
3. Market research:
It is a safety factor to do market research for a genuine lender. This is essential as now days this facility is extended even through Internet and many private small organizations who may be fraudulent. Such institutions offer very attractive terms to tempt the customers and run away with their money-leaving people in a helpless situation.
Advantages of such credit:
1. Conversion of bad credit rating into a good credit:
The biggest advantage of getting loan on poor credit is that it enables one to improve the credit rating by repaying the principal as well as the interest in time. This will help such borrower to get future loans at better terms than at present scenario.
2. Access to cars:
Purchasing of cars by paying the whole amount at the same time is not affordable by maximum people. Credit is a necessity in such a case. When a person gets loan / credit for purchase of car against the security of car itself or other asset as agreed between the parties, it gives the person access to the asset instantaneously and helps satisfy his needs. He is not held in a disadvantageous position when compared to a person with good credit.
3. Need satisfaction:
The car may be required for various reasons like business needs or for family needs or for maintaining family reputation. These could be an urgent requirement, especially in case it is required for the purpose of business. Such needs are easily met even if a person has a bad credit.
Pitfalls of such credit:
Now days, a number of advertisements can be found offering auto loan even if one has a bad credit. Though this makes the cars very affordable but this also has a number of pitfalls that are generally not visible until one take such loan. Few of them are listed below:
1.High down payment:
Depending upon the severity of the bad credit of a person, the down payment may range from 30% to 50%. This also depends on few other factors such as whether car purchased is a new car or an old car, the duration of loan, the security offered and like.
2.High interest rate:
The longer the duration, higher the risk, i.e., the probability of return of loan amounts along with interest, the higher is the interest rate. Generally it ranges between 5% to 26%. If the effective interest rate is considered, it may go upto 144% also.
3. Shorter duration:
The loan is generally offered for the duration of 2 to 4 years as against a borrower with good credit who may be granted car loan for the duration of 6 to 7 years.
4. High collateral?s/ securities:
The security, primary as well as secondary, along with guarantee could be 150% or more of the loan amount. This could impose heavy burden on the borrower with poor credit. This is quite opposed to a legitimate borrower who may have to give security of an amount equal to 110 to 125% of the loan.
5. Restrictive convenants:
A bad creditor will have to bear more restrictions than a borrower with good credit. Such restrictions may range in any field such as taking up any new household item above cost of 10000/- or taking any new credit, furnishing of bank statements and like.
6. The genuine lender:
There are various lenders who grant loan for second hand cars. If the lender is not genuine, he may tempt a borrower by giving him loan at a interest rate lower than market rate or low down payment and like. In the bargain, he may provide a low cost very old vehicle that is well polished at high cost and make profits from you. One must guard oneself against such lenders by making a market research of both vehicle as well as the lender.
Other Articles
