The latest news from Experian that shows loan terms lengthening is really not good news for borrowers with less than perfect credit, especially if they are thinking of a no money down car loan.
Longer car loans
According to Experian's latest State of the Automotive Finance Market report, borrowers are extending the terms of their car loans in order to keep their monthly payments affordable. This information is backed by data that shows that the percentage of used cars being financed for 73 to 84 months increased from 14.8 percent in the second quarter of 2014 to 19.7 percent in the second quarter of 2015.
Since borrowers with damaged credit tend to make up a higher percentage of used car buyers, it would follow that many buyers with low credit scores are either financing more expensive vehicles, or buying them with little or no money down and choosing longer loan terms in order to afford their monthly car note.
So, what's the problem with this?
Car loans with poor credit
The biggest problem with extended term car loans, especially those with no down payment, is the fact that, more often than not, the vehicle is worth less than the loan payoff – what's known as being "upside down" - for a majority of the loan term.
It's especially true for new cars that lose 15 to 20 percent of their value during their first year, and at least 10 percent of their value as soon as they're driven off the lot.
Used cars traditionally fare better than new cars, since a 2 to 3-year-old used car has taken its biggest hit in depreciation. But with 72 to 84 month loan terms, borrowers can now quickly find themselves behind the depreciation curve even with a used car. Additionally, this situation is exacerbated if the buyer has bad credit, because subprime car loans come with higher interest rates, leading to even more negative equity on either a new or used vehicle.
Longer loans are also a problem if the borrower is trying to improve his or her credit scores since, even if this occurs in a year or two, they won't be able to refinance the vehicle unless they can come up with the difference in cash, since lenders typically will refinance only a vehicle's actual cash value (ACV). The other solution, rolling the negative equity into the new loan, means these borrowers are burying themselves even further in the new loan – starting a cycle that may never end.
Tips for borrowers with tarnished credit
Here at Drivers Lane, we have the following tips for borrowers with less than perfect credit:
- Choose an affordable small or mid-sized car with a payment that is no more than 10% to 15% of your gross monthly income (the lower the better).
- Finance a vehicle for no more than 60 months (36 to 48 months is really more ideal with bad credit).
- Even if you want a zero or no money down loan, you should realize that the higher your down payment, the better the deal will look to lenders. Not including new car rebates or dealer cash, a down payment of 15% or more will typically increase the chances of an approval.
As we see it
Even as the trend toward longer car loan terms increases, borrowers with poor credit scores need to understand that the quickest way to improving their credit lies in choosing a reasonable car, keeping the loan term as short as possible, and coming up with as much of a down payment as they can afford.
Speaking of improving your credit, Drivers Lane specializes in helping borrowers with iffy credit find car dealers that can give them their best chances for an approval.
So, if you're ready to begin the process, you can start now by filling out our fast and secure online car loan application.