Guaranteed auto loans can be a good option especially if you don’t have an impressive credit score. But, did you know that this type of loan would burn a hole in your pocket? A lion’s share of American households owns a car. If you have a nice credit score, a wide range of financing options would be available for your car loan. However, if your credit score is not up to the mark, a guaranteed auto loan is the only option you have. Get to know about the drawbacks and the ways through which you can avail of a better auto loan.
Before going forward, you need to understand what a guaranteed automobile loan means. You might have come across several offers that promise you ‘guaranteed’ car loans or loans that don’t require a credit check. Displayed at various car dealerships for customers to see, this loan type is gaining popularity. These loans are generally offered to individuals who don’t have a credit score to boast of or possess an insufficient credit history. Normally, lenders asset your credit history before giving out a loan, since there might be risks associated with it.
The better your credit score, the lower the interest rate of your loan. As per a survey conducted, borrowers who have low credit scores have to shell out an 11.9% average interest rate on new cars. On the other hand, individuals with comparatively higher credit scores had to disburse a 4.6% average interest rate on new cars.
You might have heard of dealerships that offer buy-here, pay-here loans. Well, these dealerships don’t check your credit score before deciding your eligibility for the auto loan. Make a down payment and furnish documents such as residence proof and income as well as employment history. Once you sign the loan agreement, you will have to make weekly or monthly payments at the dealership.
Before you avail of a guaranteed auto loan, you need to understand the drawbacks that come with it. ‘Buy-here, pay-here’ loans tend to have comparatively higher rates of interest than those loans that you get from lenders. Usually, you might have to deal with interest rates that can go as high as 20%. Aside from that, you might also need to shell out exorbitant fees. Banks and credit unions often limit the amount you are borrowing based on the car’s market price.
When a dealership is lending you money, it might offer a bigger amount than the original value of the car. As a result, you would have to pay more on that loan than the value of your car, the moment you sign the documents and drive off. In common terms, you would call this as being kind of upside down on your loan.
Dealerships offering buy-here, pay-here loans might not submit a detailed report of your payments to the major agencies. This means that timely repayment of this loan would not benefit your credit score.
In many cases, the interest rate when signing the deal might be different from what you end up paying. Prosing a certain interest rate when you take the car, the dealer might soon withdraw his quote. He can thereby reject your loan request and force you to pay a higher rate of interest. You end up having to pay through your nose in this case as you have already taken the car home. It is a loss in every possible way for you as a customer as you end up paying a higher interest rate with no impact on your credit score.
To boost your credit score, you need to pay your bills within the stipulated time and reduce your debts as much as possible. If you have an attractive credit score and agree to make a down payment, better loan offers are bound to come your way. You can also borrow a lesser amount or shorten your loan repayment term.
Auto loans with a ‘’guaranteed’’ tag are a costly financing alternative that can drive you into paying much more than the actual value of your car. Shop around and try to seek out better options and consider guaranteed car loans as your last resort.