Bad credit car loans can be up to 84 months in duration...Long terms are used to reduce the payment but can lead to problems!
BE CAREFUL OF LONG TERMS
Bad credit auto loans are generally in the form of loan contracts known as “conditional sales contracts”. The length of loan available is generally determined by the model year and kilometres on the vehicle at the time of sale. On newer vehicles, the term can even be up to 84 months (7 years) in duration.
Paying off a loan over a very long term can result in a lower payment. Some loans even allow for the amortization of the loan to be longer than the term of the loan. While this will reduce the payment even more, there will be a balance still owing when the loan comes due which you may not be able to pay or re-finance.
THE COST OF LOCKING IN HIGH RATES
It is advantageous to lock in low rates when you can. But the reverse is obviously not true. No one should ever lock in high rates for a long time whenever it can be avoided.
When you are entering into a bad credit car loan, you are often faced with higher than normal interest rates until you can re-establish your credit. The goal is to get re-established as quickly as possible in order to qualify for lower interest rates again. Choosing a long-term contract, however, means that you’re committed to higher interest rates for a longer time period of time.
By stretching the term of repayment to lower your payment, you are also paying less principal each month and more interest. This can literally add thousands of dollars of additional interest compared to a shorter term with slightly higher payments.
REFINANCING BAD CREDIT LOANS
Refinancing a long-term high interest rate loan is often impossible. Much of the payment in the early stages of a loan goes towards covering interest costs with very little going towards principal repayment. The financed vehicle usually depreciates much faster than the loan is being paid down. As a result, the loan amount generally exceeds the finance value of the vehicle (called negative equity). Most finance sources will not finance negative equity especially if you are just starting to re-establish your credit. Without a lot of cash, you are literally locked into the contract for the duration.
If you decide that you want to trade the vehicle in for a new one, you are faced with receiving a wholesale trade value compared to the retail price you paid. This makes the negative equity even worse and the chance of getting financed even less likely without a significant down payment.
Some bad credit lenders do have programs to refinance you after a period of time based upon a good payment history. At Ezee Credit, we have assisted many customers in doing this. But getting refinanced on a new vehicle with a lower rate does not eliminate the significant negative equity left over from the first loan. This can amount to thousands of dollars! The negative equity is merely “rolled” into your next contract and must still be paid off on top of the cost of your next vehicle.
NO WAY OUT
You can find yourself committed to a long term, high interest rate contract that actually costs you significantly more than a shorter term loan. In some cases, you may still be making payments even after the vehicle is no longer road worthy because you’ve decided to no longer sink money into more repairs. This is especially the case if the vehicle you selected has higher kilometres on it from the start or you do a lot of driving on the vehicle after you get it.
In the worst case, you may end up defaulting, and further damaging your credit. This is exactly the opposite of your objective: re-establishing your credit.
With a shorter term loan, you will have increased financial flexibility to change vehicles or to refinance. That's because you will be paying more principal and less interest. You also improve your chances of successfully paying off the loan. When you do, you can show that you are more credit worthy that much sooner and start to receive the benefits of a better credit rating.
ALTERNATIVES TO LONG TERM LOANS
At Ezee Credit, we always try to structure the shortest possible term for the bad credit car loan at rates you are comfortable with. Often times, the payment increase is not significant compared to the months of payments that are eliminated by a shorter term loan.
In addition, Ezee Credit focuses on offering its customers the choice of selecting a bad credit auto lease which is not offered by many bad credit auto lenders. A vehicle lease can provide you with a newer vehicle on shorter terms, still with affordable payments and less overall financing costs. It should be carefully considered as an alternative before making any decision.
