If you want a new car but your credit needs some work, maybe you could consider guaranteed auto loans. And it is different from a bad credit loan.
What are guaranteed auto loans?
Guaranteed auto loans means getting money for a car without checking your credit. Instead of doing a credit check, dealers who offer in-house financing consider your income to determine how much you can borrow. It is a great choice for people who need a car quickly but have credit problems. But since these dealers have minimum income requirements, you must ensure your income makes you eligible.
At guaranteed auto financing dealerships, you can often get approved for a car you can drive away on the same day. Yes, it is possible if you qualify, have the required documents, and make a down payment. Most likely, you’ll be able to get relatively new used cars, and the interest rate will be higher than what you’d get from a subprime lender. Also, because most dealerships that offer guaranteed auto financing don’t check your credit, they aren’t as likely to report your loan and payments to the national credit bureaus.
What are the requirements for guaranteed auto financing?
If you don’t have great credit, guaranteed car financing can be a quick and easy way to buy a car. You can get pre-approved for a car and drive it off the dealer’s lot the same day. As with any financing plan, you’ll need to meet the requirements, show the right paperwork, and make a down payment. Here’s what you’ll need to get started with a dealer on guaranteed car financing:
- Minimum monthly income before taxes of $1,500 to $2,000.
- Recent paycheck stub.
- Down payment around $1,000, or 10% of the price of the car.
- Proof of residency.
- List of personal references.
Also read: Car Loan with Bad Credit: All You Need to Know to Get a Good Deal
What to avoid with guaranteed auto loans
Most buy-here, pay-here loans have much higher interest rates and fees than other loans. Interest rates on these loans could be as high as 20%, and you might also have to pay high fees.
Borrowing more than the car is worth
Banks and credit unions set loan limits based on how much the car you want to buy is worth. When a dealership lends you money, it might give you more than the car is worth. This happens more often at “buy here, pay here” car lots. When this happens, as soon as you sign the paperwork and drive off the lot, you owe more on your auto loan than it is worth. People often call this an upside-down loan situation.
Also read: What Is An Upside Down Car Loan And How To Get Out Of It?
Building your credit
Buy-here, pay-here Lenders may not tell the major consumer credit-reporting agencies about your payments. So, even if you pay on time every month, this loan won’t help you build your credit score.
Getting the right loan terms
The lender may offer you a specific interest rate and finance after the final approval. Then you are allowed to take the vehicle home. But then the lender may later inform you that the loan it had offered you were not approved. And you will be required to pay a higher interest rate – all after you have driven the car off the lot. Don’t leave the dealership without finishing the financing and signing the paper to avoid this. And make sure you thoroughly understand your loan terms to avoid surprises later on.
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Alternatives to guaranteed auto loans
Borrowing less or reducing your loan term
If you’re willing to buy a less expensive car, you might acquire a loan with better terms and conditions. The same is true for a loan with a shorter term. With a longer loan term, your monthly payment will probably be lower, but you’ll pay interest for a longer time, which means you’ll pay more in interest overall.
Waiting to purchase a car until your credit improves
You could improve your credit and save for a car down payment if you keep driving your current car, borrow a car from family or friends, carpool, or take public transportation. You can improve your credit score with timely payments and getting rid of debt. If you have better credit and a down payment, you may get more loan offers with lower interest rates, so waiting might be worth it. And while you wait, it’s a good idea to keep an eye on your credit by checking your scores often.
Also read: Does Refinancing a Car Hurt Your Credit: All You Need To Know
Lenders and dealerships aren’t required to give you the best interest rates, so the only way to know if you’re getting the best deal is to compare multiple offers. If you look around, you might also be able to find lenders who will give people with little or no credit fair loan terms.
Finding a dealership with a special financing department
Some dealerships have a special finance department that works with a network of lenders to help people with bad credit get approved for car loans. But like guaranteed or “buy here, pay here” loans, these loans usually have high-interest rates and may require a down payment.
Getting a co-signer
If you have bad credit, a co-signer with good credit could help you get a loan and a lower interest rate. Co-signers take on a lot of risks because if you can’t pay back your loan, they are legally obligated to do so. Get a co-signer only if you think you can make your monthly payments. You could burn a bridge or hurt your co-credit if you can’t.
Guaranteed auto loans are a costly financing option that can make you pay more than the automobile is worth, so they should be your last resort. Search around to see if a shorter loan term or a lesser loan amount could help you get accepted for a lower-interest vehicle loan. If you have no alternative but to obtain a guaranteed auto loan right now, prioritize your credit improvement. Once you’ve established your credit, you might consider refinancing your car loan to achieve a cheaper interest rate.
FAQs on guaranteed loan
How does guaranteed financing work?
A guaranteed loan is one that is issued if a third party agrees to guarantee the loan. It allows those with bad credit or weak financial standing to apply for a loan. If the borrower defaults, the third party must satisfy the lender’s obligation in full or in part.
A third-party act as the borrower’s guarantee. It decreases the lender’s risk associated with the inability to secure payback from the borrower. When the borrower is not able to make a payment, the third party is accountable for the loan’s repayment to the lender.
Does In-house financing help to build your credit?
Absolutely! Payments are reported to major credit bureaus by many in-house finance dealerships. This means that if you make on-time payments, your credit report will improve, resulting in a higher score in the future. With guaranteed vehicle financing, you obtain the car you need while still having the opportunity to develop your credit. If you’re worried about establishing credit, inquire whether the dealer reports to the major credit bureaus.
What is a fully guaranteed loan?
Fully guaranteed loans hold the third-party accountable for the loan payments. A lender can ask for a guarantee if they don’t want to give someone money alone. If the borrower can’t pay back the loan in full, the third party who gave the guarantee is responsible.
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