Alternative financing
for vehicles includes subprime bank loans and buy-here, pay-here programs. Both options allow people who do not have good credit, also known as high-risk buyers, to purchase a vehicle without having to pay cash. Before pursuing a car purchase using either of these sources, consider the benefits and disadvantages to decide which is financially best for you.
Benefits
For a customer with poor credit, subprime financing or specialty lots may prove the only option to purchase a vehicle without cash on hand. Some buy-here, pay-here lots and most subprime lenders report to the three major credit bureaus, which can improve your credit score over the term of the loan. If you make your payments on time and carry out the term of the loan, you can establish a positive borrowing history. In the future, you may not have to use alternative finance methods.
Interest Rates
One downfall of alternative lending is the interest rate offered for the loan. In some states, subprime lenders can charge an interest rate as high as 29 percent. This will affect the vehicle that you choose because of budgeting issues. Without putting significant money down, you may find that a $5,000 loan warrants you a payment of more than $300 a month with such an interest rate. Alternative finance providers also limit your term, so even a car loan for $5,000 may have to be paid off within a year to 18 months.
Money Down
In addition to term and rate, many alternative lenders want a decent amount of money down. While this differs by lender, you can expect to put around $1,000 or more toward your loan. Some subprime lenders require half of the vehicle's value as down payment, affecting the year and mileage of the car you pick out. If you have to pick out an older car with high mileage, you aren't likely to have a warranty on the vehicle. For this reason, take the vehicle to a mechanic before you buy. Otherwise, you may be forced to pay for repairs.
Warning
Find out about the lender's repossession rules. A repossession can damage your credit even more. Alternative financing companies do not offer much of a grace period for late payments, so find out how long your payment grace period is. Ask about late fees, as well. Some buy-here, pay-here lots put a vehicle deactivating and tracking device in the car, meaning that it will not start if your payment is late. To avoid expenses or further damage to your credit, ensure you know about the bank's payment and repossession procedures before you sign a contract.
