How Can You Choose A Car Loan Term When You Have Poor Credit?
It might feel like many things are out of your control when buying a car with poor credit, but there's one ball that's entirely in your court: your loan term. The loan term refers to the length of your loan, and you'll usually have many options. A longer term means lower monthly payments but at the cost of higher overall interest throughout the length of the loan.
There's often no single best answer when it comes to choosing a loan term, but there are a few factors to consider. If you're coming into this process with poor credit, keep these three critical points in mind before deciding how long of a commitment to make.
1. Consider Your Other Obligations
A car loan can be an excellent part of a larger plan to rebuild your credit, but it's still just a single component. You'll also need to keep up with your other obligations, including paying bills on time and working down old debt. A high monthly payment can make fulfilling your other financial obligations more challenging.
While you'll pay more over the long run, choosing a loan with a longer term can free up more money for these other payments. Remember that staying in good standing with your creditors is more crucial for rebuilding credit than paying less money over the long run. In these cases, that lower monthly payment can provide far more benefits than spending less on interest over the life of the loan.
2. Balance Equity and Payments
Equity is your ownership of your car. When you first finance a new vehicle, your equity will be relatively low compared to your lender. As you pay against your loan's principal, you'll build equity, ultimately owning a more significant percentage of the vehicle. Unfortunately, cars also lose value over time, so the value of your equity will decrease.
A longer-term loan will mean that you build equity more slowly, so you may have trouble keeping up with your vehicle's depreciation. While this isn't necessarily a dealbreaker, you should factor it into your decision. Ultimately, you'll need to balance an affordable monthly payment for your budget with your equity goals.
3. Think About Future Goals
Do you plan to finance other large purchases in the future, such as home renovations or even a new mortgage? Your debt-to-income (DTI) ratio can impact your chances of loan approval for these purchases, so it's crucial to consider them when deciding on a monthly car payment. Taking a vehicle loan for a longer term means spending less of your monthly income servicing debt.
Thinking about the future is one of the best ways to ensure your car loan has a positive impact on your finances and credit score. By choosing a loan term that results in an affordable monthly payment, you can work towards your future even if you're still rebuilding a poor credit score.
Contact a bad credit car financing dealership today for more information.