Do you know how Buy Here Pay Here Dealer Financing works?
If you are in need of one of the bad credit car dealerships in the United States because of some unfortunate financial situations have left you with bad credit and you are in desperate need of a car, this article may just be able to help.
In today’s article, you will learn exactly how the bad credit auto financing process works as well as some important things to look out for when buying a car with bad credit.
For additional information on how to get approved for a bad credit auto loan, please be sure to watch the following video:
So with no more delays, let’s get started!
How Dealerships Auto Financing Works
Many people are under the assumption that car dealers only make money on the sale price of a vehicle. If this were true, it would make buying a car much simpler and getting a better auto loan rate a lot easier.
This is not the case, however, and very few people that are outside of the car business or have never worked in that industry are aware of exactly how it works. The fact is that the sale price of the vehicle only amounts to a small part of the total picture.
When you go into a car dealership to buy a car, the sale price primarily covers the cost of the car, the cost of dealership overhead and the salesperson’s commission. That is called front end profit. Where the real money is made, is in what is called back end profit.
When a dealership takes your credit application and sends it to a few lenders, the lenders send a response that either approves or denies your application. If your application is denied there is generally a good clear answer as to why which helps the dealer to know in the future what to look for prior to submitting applications to that particular company.
If your application is approved, there are a few different factors that are involved. There is be amount allowed for financing, a percentage of that amount that the creditor will allow for an extended warranty, and the number of percentage points that the dealer can add to the loan.
These percentage points, otherwise known as dealer add-on rate, are where a lot of hidden money is made in car dealerships. To elaborate on this, let’s have a simple example.
Let’s say that the creditor or loan company, approves your loan at an interest rate of 11%. That is a reasonable auto loan rate for someone that has had some bumps in the road on their credit report. If the approval comes back allowing the dealer a dealer add-on rate, of 4%, then the dealer can add 2%, 3% or 4% to your auto loan rate.
The difference between paying 11% or 14% on your car loan, can make a substantial difference in the amount of your car payment. In many cases, this can add $150 or more to your monthly car payment. The additional amount that you pay each month because of the dealer add-on rate, is divided between the car dealership and the finance company.
So what happens if you trade your car before your car is paid off? Generally, a dealership is only charged back if you trade your vehicle within the first year. That is why the dealership is not advanced the full amount of the extra profit that is made on the dealer add-on rate.
How can you avoid this? With the veil of secrecy being held closed so tight in car dealerships, regarding this issue, the public really has no way of even knowing what their true interest rate is when they are approved.
The only way to avoid this is to seek financing outside of a car dealership and even then similar principles operate with bank loan officers. One of the best ways of avoiding this is comparing auto loan rate quotes from multiple companies or using a service that uses the best rate for you.
Not all car purchasers with decrease credit scores are informed of the importance of bad credit car loans. As an issue of simple fact, most of them are not informed that this loan could basically enable fix their ruined credit.
As a consequence, people who want to finance an auto loan with below-normal scores are hesitant in acquiring loans that they could use in obtaining a car. Some of them refuse to buy their cars irrespective of the actuality that they badly need to have these.
In purchase to aid very low credit score holders to realize and recognize the value of bad credit auto loans, here are some substantial facts about this and these are the following.
Pros & Cons of Bad Credit Auto Loans
This Assists in Fixing Damaged Credit
Only a couple of potential car buyers with credit problems know that a bad credit car loan could enable them to restore their ruined credit. What this loan offers is the chance that a bad credit holder to have a financial obligation that he or she could spend so as to permit his or her credit score to rise.
But in this form of a loan, the creditor is obliged to fork out the month-to-month rates on time to permit the credit score to increase. Late payments could do more damage to the broken credit of a person. Given this, it is appropriate for the creditor to provide prompt payments until the expression ends.
Not all Loan Companies Provide this Loan
Car customers who are fascinated in getting this loan need to also know that not all loan providers are inclined to give this. The main purpose for this is that the risks concerned are terrific. Bad credit holders are susceptible to loan default and may operate absent from their economic obligations.
Due to this, a creditor with a down below-average credit score could possibly attain this sort of loan from specialized loan providers, dealerships, and credit unions. Even so, bad credit holders could very easily discover this sort of loan by consulting some of the car suggestions offered on-line or by looking for support from motor vehicle financing gurus.
This Involves Increased Premiums
Car loans made available for bad credit holders also include larger premiums. This is due to the fact the fascination rates connected to these are somewhat increased than any other loan forms.
Lenders offer bigger interests on these to reduce the danger and the probable losses that they would incur in the event that the loan holders operate away from their economic obligations.
In order to minimize the regular monthly rates, it is advisable to finance a low-cost new car using this loan. An affordable new car has a lower price making the quantity owed from the loan provider, the fascination rate, and the monthly payments lower.
Now that you have all the information you need on knowing exactly how a bad credit auto loan works, there is no reason to be afraid to apply for one so that you can finally get that used car you desperately need.
If you are still in search of more information on how to find bad credit car dealerships or how to find the best used cars for sale in your area, be sure to take a look at the following related articles.