July 17th, 2018 by

Most people in America deal with financial problems. Doesn’t matter if you have spiraled into a financial hole due to pure bad luck or made some bad decisions you’re not alone. You actually belong to a club that, according to, a third of Americans belongs to. A club of people with a credit score rating of less than 601. Which by the way, that is the difference between “fair” and “bad”. Now, what do you do if you have less than perfect credit and you need to purchase a car?

Let me paint you a not-so-pretty picture. Sara has a less than perfect credit score, but was approved for a $25,000 car loan. If you have a fair to poor credit rating, you can pay anywhere from 7%, or higher in interest. With a credit score of 582, Sara was given a 14% interest rate – a national average interest rate of a person with a bad credit score. The average car loans are about 5-6 years. In 2014, 62 percent of the auto loans were for terms over 60 months. Sara’s car loan is termed at 60 months. So, what does that look like? Sara will be paying $582 a month. Consequently, by the time she has paid off the loan, she will pay a total of $34,902. That is $9,902 from the interest rate. Seems ridiculous? We agree.
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Unfortunately, this is not an unusual situation. If you are on the same boat as Sara, then you probably can’t do much about your situation. However, there are ways you can attempt to make the situation better during the duration of the loan. The goal is to pay as much as you can, as fast as you can. This way, you can save money in interest rates. Not to mention, your credit rating and history will significantly improve.
Split your one monthly payment into two twice a month payment. So, what does that look like with Sara? Instead of paying $582/month (in 12 payments) which will equal to $6,984 a year, Sara will pay $291/bi-weekly. Since there are 52 weeks in a year, she will end up paying $7,566 (in 26 payments) a year. In essence, she will end up paying an extra payment for the calendar year. More importantly, when applying payments more often, less of the interest rate will accumulate.

There is another way you can pay 13 payments in a year. Divide your monthly payment into 12, then add that amount to the current monthly payments. If we apply this to our friend Sara, she will add $48 to her current monthly payments, and pay $630/month.

If the above suggestions don’t fit your budget, still apply the same principle as much as you can. You can try to pay more towards the loan by rounding up the monthly payment. Instead of $582, Sara will pay $600. Needless to say, the more you tack onto the monthly payments, the better. And even if you are implementing the other suggestions, add this one concurrently.

One of the positive aspects about a car loan is when you are diligent with your payments, it can significantly bump up your credit score, and bump it up fast. After a little over a year, you can refinance your loan for a lower interest rate. As you have painfully figured out, credit history and score is vitally important when applying for a loan. Therefore, if you act with good payment behavior, like paying on-time or faster than expected, paying more times than required, and paying more than owed then you look more appealing to creditors. When you’re credit score is in a good place you have more options. Shop around for a lower interest rate loan.

Sign up for auto-pay. Some companies offer discounts with the auto-pay feature. Even if you are splitting your monthly payments into bi-weekly payments, you can set that up with the customer service rep. This will also ensure that you pay your payments on time.

Go paperless. Some companies offer discounts when you opt to go paperless. You can call the customer service line or do this online through the company’s website. Create an online account to sign up for email notifications, track your payment history, and pay online. Because who wants more paper to shred, anyway? You can also check your payment history with your bank app when you use a bank account to make payments if your loan company is stuck in the last century and doesn’t offer these features.

Be proactive and call the customer service line to ask about discount programs and, or ways you can save money. It never hurts to ask. Plus, how will you know until you ask. Remember, they want your business as much as you need theirs.

If you haven’t purchased a car yet, but know you will end up applying for a loan with less than perfect credit score, then good for you for doing your research first. Take a look at your financial situation and calculate what you can afford. Now, you might not be able to do much for a better interest rate, but let me offer one other piece of advice, and I can’t stress this enough, buy a car that cost less than what you can afford. In other words, although Sara was approved for a $25,000 loan and she can make those monthly payments comfortably, she will be better off buying a car that is less than $20,000. You can still purchase a brand new car with most of the glamours features for about $20,000.

Hey friend, it really doesn’t matter how you ended up in this painful situation. Maybe you have to build a credit history, or you’re rebuilding your poor credit history, take this loan at face value and use it to your benefit. Be smart, opt for the lesser car, pay quickly and diligently so you will be in a better financial situation down the road.

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