Ways to Avoid a Bad Car Loan
‘Avoiding a bad car loan’ can mean a number of things:
- The rates and repayments are too high
- The car is bad and it’s on finance
- I can’t even get finance approved!
In this article, we’ll go over the common types of ‘bad car loans’ and list some ways to avoid them…
The rates are too high!
Often, this means lenders consider the risk of lending a borrower money too high. In a nutshell, lenders look at a borrower’s profile and ask the following:
- Can the applicant afford the repayments each month? (Capacity)
- Did the applicant repay any previous loans? (Credit history)
- Does the applicant have any assets to secure the loan with? (Collateral)
- Does the applicant have solid employment and residence? (Stability)
The less the answers are ‘yes’ is to the above considerations, the higher the risk – and the higher the interest rates will be. There are several things you can do to get lower rates.
To avoid high rates:
Make sure your employment is secure, you should have a few years of employment history with the same employer and of course, not be on probation.
Clean up your bank statements too – avoid any gambling and large cash withdrawals. Lenders like to see clean banking conduct.
Try to avoid having other loans by paying them off first. This will increase your capacity to repay the new loan and prove your credit history.
The repayments are too high!
This can happen for several reasons. For example, your income or employment situation may have changed and you can’t afford the repayments like you could in the past. Another example may be increasing expenses from other factors.
To avoid high repayments:
Talk to your lender. If you have a good repayment history, you can often extend the loan term and decrease the amount you pay per month.
Refinance. There are many reasons why people take out personal loans and debt consolidation is one of them. This means taking out a new loan with better rates and lower repayments to pay off the current one.
I don’t like my car which is on finance!
People sell and trade in cars which are on finance all the time. Some lenders require borrowers to trade in the car to a licenced dealer only as the car is secured to the loan. The first step is to talk to your lender.
- If you sell the car, you will have to pay the remaining loan balance with the money you receive from the sale of the car. Note, some lenders do not allow private sales.
- Trading in the car is easier. A licenced dealer will use the money they ‘pay’ you for the car you trade in to complete the loan, allowing them to own the car outright.
- Trade in and upgrade. If you’re looking to upgrade your car, you’ll have the option to trade in your current car, pay off your current loan and start again with a new vehicle.
Tip: Check the amount owing on your car by asking your lender for a payout figure.
I can’t even get approved for a loan!
This means lenders consider the loan just too risky. This can happen for a number of reasons: the car is too old or a privately imported vehicle, income capacity is too low to add repayments onto living expenses, etc.
Fortunately, there are ways to increase the chances of approval and get that new car:
- Use a co-signer. This is usually someone with a high credit score and solid employment and capacity to repay the loan if you, the borrower can’t. An example is a parent co-signing with a student.
End of the Day
There are many ways to alter, get into or out of a bad car loan – and avoid them all together. The best solution is to talk to a broker. Brokers are financial experts who deal with car loans and finance applications all day. Better yet, they can point you in the right direction without formally applying for a loan so you’ll avoid those nasty enquiries on your credit file.
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