Interest rates on car loans are either variable or fixed. The fixed interest rate is the least preferred due to its restrictive nature when it comes to payment periods. Auto loans Baltimore interest rates are usually calculated with respect to simple interest rates. This means that the interest is charged only on the owed amount rather than the total loan amount. However, the interest rates on car loans are significantly dependent on credit score as discussed below.
High Credit Score
A credit score is a measure of your eligibility to settle debts. Interest rates are inversely proportional to the credit score. Simply put, the higher your credit score, the lower the rates of your auto loan. A high credit score is anything above 750. Most car dealerships offer “zero percent interest” loans for persons with credit scores above 750.
Low Credit Scores
A credit score of about 550 is assign of an unreliable borrower. You will have to make a 20% down payment when processing auto loans Baltimore. Additionally, the interest rate becomes prohibitively high. For example, in 2015, the interest rate for a 72-month loan was 2.9% for those with high credit records. This rate tripled as the score fell by 100 points.
Bad Credit or No Credit
Bad credit is a result of being blacklisted or having no credits at all. Though it is not impossible to attain car loans with such credentials, lenders will obviously make it difficult through prohibitive costs.
The reason for this is because offering auto loans to such persons is a great risk. Consequently, their repayment plan ensures they break even in case the borrower defaults payments two years after the deal.
Secured Car Loans
Besides lump sum down payment and high-interest rates for those with bad credit credits, auto loan lenders also use the car as security for the loan. Such type of loan is known as a secured auto loan. The lender can seize the car in case of defaulted payments. It is more secure than unsecured debts which are available to persons with higher credit scores.
Handling Bad Credit Score
Having a bad credit score is not a financial suicide. There are a few of ways you can mitigate its adverse effects on your auto loan. First, if you are planning to take a car loan, then pay your outstanding debts. Then as your credit score improves start saving for the down payment.
Once your savings can cover at least 20-30% of the total cost, you should then negotiate for a short-term loan. Loan contracts shorter than 72-month period attract lower interest rates. In the meantime, you should consider leasing. It offers lower down payments, monthly payments, and maintenance cost. But you traveling needs shall still be met without sinking deeper into debt.