In the past, traditional banks and lenders considered sub-prime credit borrowers risky and rejected their loan application. People with sub-prime credit history were often forced to obtain obnoxious rates and horrible car loan terms of buy-here-pay-here dealers. But, today the story is different.
Stiff competition in the auto financing market and increasing number of people with credit issues has compelled lenders to offer their services to sub-prime credit borrowers.
Are you eligible for Sub-prime Car Loans?
Every sub-prime car buyer does not receive car loan approval. If you want to obtain the loan program, you should fulfill the following requirements:
Current Employment
You must be working with your current employer for at least six months. Lenders will need your employment verification letter as well as copies of recent pay stubs to confirm the employment status.
Down Payment
It is important to manifest your stable financial capacity to lenders. It will help them in taking a favorable decision. If you are buying an inexpensive used car, you can make a down payment of ten percent. But, if you are opting for a brand new car, it is wise to save up to twenty percent of the car cost for down payment.
Lower Debts
Lenders won’t have any problem in approving sub-prime loan application of car buyer with few financial commitments. So, if you have several loans, it is important that you pay off a few of them and improve your DTI ratio.
No Open Bankruptcy
Every auto lender considers open bankruptcy as a bad sign. He/she will not offer you loan quotes if you are in the middle of a bankruptcy. So, don’t apply for a loan during bankruptcy.
What Costs should you consider before signing a Sub-Prime Car Loan Contract?
A recent report published by Experian suggests that auto loan delinquencies rose by 8.6 percent in the third quarter compared to last year. Most experts are attributing this rise to sub-prime car loans.
Many car buyers obtain sub-prime car loans without considering their financial condition and end up in a financial mess. If you are thinking of obtaining a sub-prime car loan, understand your financial condition and take into consideration the several car buying costs.
The Loan Costs
When you have sub-prime credit history, you will receive higher loan rates than the average market rates. It will make your loan expensive. You must consider the increased cost before signing the loan contract. You must also pay attention to other loan-related expenses such as application fees, document charges, pre-payment penalty, etc.
Dealer Fees and Taxation
Fees structure varies from one dealer to another. But, here are the most common fees charged by dealers
1. Vehicle license and registration fee
2. Title fee
3. Documentation fee
4. Compliance fee
5. Floor plan fee
6. Advertising fee
7. Dealer preparation fee/Shipping fee
8. Sales tax
A dealer charges additional fees such as emissions testing fee, fee for vehicle inspections and smog checks from a used car buyer.
The Car Costs
Once you buy a car, you will have to consider several expenses such as car insurance, repair and maintenance costs, fuel costs, etc.
If you think you can manage the cost of buying a car, only then sign the sub-prime car loan contract. Remember that assuming financial obligation without thorough thinking can cause a financial disaster. So, don’t be in a hurry to obtain a sub-prime car loan. Think about it and then say yes.
