How do Bad Credit Car Loan Interest Rates work?

Just because you have had bad credit problems in the past, you still want to make sure you are getting the best deal, right?

What needs to be understood is that the vehicle loans provided by financiers that specialise in this market, price their interest rates according to risk analysis.

The lender will consider past statistics to allow them to consider how likely an applicant is going to pay their loan on time for the full term, and they need to factor in slow payment history, or non-payment, as these circumstances add costs to their business.

For those clients that conduct their car finance poorly, are actually punishing themselves, but also those with the right intentions in improving their position to enable them to get a fair car loan.

What kind of interest rates should you expect?

The strength of your application will come down to the severity of your credit history, where a small paid default will be assessed much more favourably than a discharged bankrupt for example.

The lending analyst will also consider many other factors in determining what interest rates to apply to the car loan and would include things such as stability in employment and residence, net asset position and surplus income after all expenses.

If the credit issues are not too severe like a small paid default, you may be able to expect the same kind of interest rates as a normal car loan, but if the defaults are larger and/or unpaid, or there are multiple defaults your interest rate will start to increase, with a maximum bad credit car loan being 29.90% for the most severe past credit problems.

How can a lender justify this?

Although the interest rates can seem ridiculously high, the lender has analysed the likelihood of an auto loan going into default and unfortunately those that have kept their financing conduct consistently poor, even when they have been given a second chance, have given the reason as to how these auto loans are to be priced.

The lender has a business to operate and could not afford to give a lot of the clients they take on prime interest rates as the business would not be sustainable with the amount of slow or lost accounts they have taken on.

Why would someone accept a high interest rate car loan?

If used wisely, the high interest rate bad credit car loan can be a stepping stone to getting a fairer deal the next time you’re looking at vehicle financing.

My suggestion would be to look at cheaper cars when taking out a bad credit car loan, as the more you borrow, the more interest you will pay and then the actual higher interest rate will inflate the amount of interest you pay over the term of the loan.

If you can afford more, and if the vehicle finance contract allows, make additional repayments to what you could afford and drive a cheaper car for a short time until you have shown good car financing conduct, then look at trading this car in after some time to upgrade to the better car and you would then be able to look at getting a fairer deal, as you would then have what is known in the industry as “correctable credit”, where prime lenders can check on your loan conduct since your credit problems opening up the doors to a better deal.