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Why are interest rates higher on bad credit car loans?
Understanding the reasons behind your interest rates is vital when it comes to applying for alternative finance. Not only can having this knowledge help you to bring down the price of your monthly repayments, but it can aid you in bettering your credit score for the future. To help you out, we will be providing you with insight into why interest rates are higher on bad credit car loans.
Negative Impact of Credit Score
When applying for bad credit car loans it is important to note that your credit score can have a significant impact on the interest rate associated with the loan. In order to potentially reduce this interest rate and make your loan more affordable, you can begin to better your credit score. Though this may work in some cases to reduce the interest rate, it will certainly aid in improving your chances of being accepted for your chosen loan type. It can take some time to raise your credit score, but there are some simple steps you can take quickly, such as registering on the electoral roll with your local council.
Increased Risk for Lenders
One of the reasons that interest rates are much higher on bad credit loans is the risk involved for the lender. Providing alternative finance to those who have a history of defaulting on credit agreements, which is a very common cause of a low credit score, comes with a high-risk factor. Due to this, the lender may choose to associate a higher interest rate to those applicants. The interest rate will be applied on all repayments and could have a substantial impact on your monthly contractual payment. Though it will require some time to better your financial position, you can better your chances of being accepted for your loan in the long term with a reduced risk.
Deposit Size Affects Monthly Payments
When applying for car finance, it is important to look at the impact the size of your deposit can have on your monthly repayments. Often one of the ways that you can bring down the contractual payment amount is to raise your initial deposit, potentially making the option more affordable. The larger the deposit you can put down, the less you are borrowing and therefore the cheaper your overall monthly repayments will be when purchasing a car. By bettering your credit score and saving up for a deposit beforehand, you can then drive your perfect car with payments to suit your finances.
Different Lenders with Different Pricing
The final reason behind increased interest rates is the lender that you are borrowing from. With many of them having different processes when it comes to the acceptance rate, shopping around will ensure that you get the right interest rate for you. Whether you decide to go through a brokerage for your car finance, or you opt for a deal directly with the lender, this will enable you to find an APR that is right for your personal circumstances and for affordable monthly repayments. Though it will take time to shop around, this is likely to benefit you moving forward and will ensure all repayments are met without damaging your credit score any further.
With this in mind, there are several ways that a loan can be affected by a poor credit score. Where will you start when applying for your own car finance options?