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Finance A Car With Bad Credit

One tip to paying the least and making the most of your situation when you finance a car with bad credit is to keep the loan term as short as possible.

Although a shorter loan term will raise the monthly payment, especially when you finance a car with bad credit, it will also lower the total amount of interest paid on the loan. As an example, if you finance a car with bad credit and it has a selling price of $15,000 plus a seven percent sales tax (which is about average) as well as fees (let's say $120 – non taxable), the total comes to $16,170. If you have a down payment of $2,000, the amount of the loan will be $14,170.



If you finance a car with bad credit for 60 months, chances are your payment could be $337 per month. If this is the case, the amount of interest that you will pay over the life of the loan will be $6034 (you can duplicate this process by using a loan calculator).

Using this same example, if you were to reduce the loan period to 48 months, the monthly payment would increase to $394, but the amount of interest would drop to $4742 – a decrease of almost $1300 when compared to the five year loan (again, you can use a loan calculator to verify these figures). This is also assuming the interest rate remains the same. In many cases, if you finance a car with bad credit, the lender will reduce the interest rate slightly if you decide to finance it for a shorter term.

There are additional benefits to shortening the term, especially if you finance a car with bad credit. It's a fact that a vehicle loses its value over time. If you owe more on your car that it appraises for when the time comes to trade it in, you have what is known as negative equity (also known as being “upside down” in your loan). By shortening the loan term, you reduce the chances of negative equity earlier in the loan term. This means that when you are ready to trade in you old car in order to get a new car at a lower interest rate – the whole purpose when you finance a car with bad credit - you may actually have equity in your car at that time.

To put it simply: when you finance a car with bad credit for a shorter period of time, you have turned a negative (no equity or negative equity in your car) into a positive (no negative equity and possibly trade equity in your car).