Understanding the Interest Rates for Bad Credit Car Loans
Australians try to avoid having bad credit whenever possible. However, sometimes you’re forced to deal with a bad credit profile. This tends to make things challenging, especially when you’re planning to apply for a car loan.
Fortunately, it’s still possible if you apply for bad credit car loans. In this article, we’ll discuss the typical interest rates for bad credit car loans, as well as some tips on how you can get a better interest rate.
Why are interest rates high when you have bad credit?
Bad credit will no doubt cost you hundreds or even thousands of dollars throughout your lifetime, and it’s simply because you will need to pay a higher interest rate. With a bad credit profile, also known as a low credit score, you’ll be dealing with higher interest rates, which means you’ll be spending a lot of extra money every month.
The question is, why?
People with bad credit are charged with higher interest rates because lenders see you as a higher risk of defaulting. They charge a higher interest rate to protect themselves from risk.
Lenders are very particular about who they lend money to. If you have bad credit, they will impose a higher interest rate. On the other hand, having excellent credit will allow you to enjoy easier access to finance and lower interest rates.
A comparison between good and bad credit interest rates
Interest rates for bad credit car loans can be very high. In Australia, the maximum rate advertised is at 29.9%. However, depending on how bad your credit is, you may be entitled to a or lower rate.
For someone with an excellent credit standing, typically around 700 to 850 credit score, the lowest possible rate is at 4.45 per cent p.a. while people with average credit often get interest rates around 5 to 6 per cent.
However, if you have bad credit, it could vary from 10 to 20 per cent, up to the maximum advertised rate. If you can boost your credit score before you apply for bad credit car loans, you can end up saving up to thousands of dollars over the life of the loan.
If you apply for bad credit car loans, the interest rate you’re expected to pay will depend on several factors such as the following:
1. The car’s age
Buying a brand new car may entitle you to a rate lower than 10%. However, most people often apply for bad credit car loans of only a few thousand dollars to buy a secondhand car, since they think this is the limit to what they can borrow.
If you have stable employment and residence, a lender is more likely to provide you with a car loan. However, your chances will decrease if you frequently switch jobs every three to four months. The same goes for the house you’re currently living in. If you have been living in the same house for more than a year, lenders are more likely to approve your loan.
How you can get a better interest rate for bad credit car loans
To enjoy a better interest rate when applying for bad credit car loans, here are some tips and advice you should consider:
- Get stable employment and residence. As mentioned earlier, having a stable source of income and a stable residence will increase the likelihood of your loan approval. Moreover, it will also decrease the interest rates you’re required to pay.
- Settle your financial obligations on time. Try to avoid debt as much as possible. Also, make sure you pay your open accounts on or ahead of time.
- Close any credit cards and pay out any loans that you have to increase your capacity to repay a car loan.
Once you’re able to increase your credit score, you can then apply for bad credit car loans with a much lower interest rate.
The difference between lower and higher interest rates
To understand the difference between a lower and higher rate, let us take this example:
George has a credit score of 720 while Ryan has 400. George has a stable job, his own house where he lives for more than two years, and tries to pay off his debts as soon as possible. Ryan, on the other hand, is a full-time artist with no stable income and relies only on Centrelink for his income payments.
Both of them apply for a car loan and decide to buy a $15,000 car on a 60-month loan.
- George enjoys a 5% interest rate, and he’s going to pay $283.07 per month.
- Ryan has a 20%, and he’s expected to pay $397.41 per month.
- After 60 months, Ryan will have paid $6,860.40 more for the same car.
Even though Ryan has a bad credit profile, he is still able to get approved for a bad credit car loan. As a result, he’ll end up paying more since his interest rate is a lot higher.
Fortunately, if you have bad credit, you can take advantage of lower interest rates through our bad credit car loans. Often, credit history alone won’t tell the entire story, and that’s why we’re here to help.
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