Need a used car loan, bad credit. What NOT to do. Part 2

Need a used car loan, bad credit. What NOT to do? As we discussed in part 1 of our series on what not to do if you need a used car loan and you have bad credit, making a bad choice with car loans is easily done. It is important that you arm yourself with knowledge to avoid the pitfalls so many of us fall into. This article is only a beginning and a poor one at that, but it will help you to think in the right lines about how to avoid getting ripped off on your used car loan.

Needing a car loan and having bad credit can be a very difficult position to be in. You need the car, but your history with loans is not great. You might even be scared about what will happen if life changes again and you are unable to pay those monthly installments. You are right to worry about this. It would irresponsible to ask people to dive into debt without thinking long and hard if it really is a good idea. When people borrow irresponsibly nobody wins, not the banks or lending companies and certainly not the customers. The present crisis we are going through was partially provoked by the greedy and non sensical trend of living beyond your means. Ironically the capitalist society we live in and enjoy so much when things are going well can only thrive in a materialistic environment that thrives on filling imaginary needs.

A balance needs to be met, check you can afford this new loan and if you can choose your options cleverly. In our last article we discussed the trap of choosing small monthly payments and long loans. This is a popular option for people with tight budgets. The catch is that you pay much more, and I mean much more, interest on a never ending loan.

Another popular trap is a long tenure loan. These loans share the same problem with the low monthly repayment loans, in fact they are a natural consequence of them. A long tenure car loan will increase the cost in interest of your loan exponentially, literally. Let’s illustrate this, the interest you pay is determined by this formula: A = p(1+r)^n

A is the total cost of your loan, p is the capital you initially borrow, r is the interest rate and n is the length in years of your loan. There are two factors besides the actual capital you borrow that determine the real cost of your loan. The interest rate and your loan tenure. If you increase the tenure of your loan you increase n to the power of the years your loan lasts and increase your loan exponentially.

People fall for these loans because they can borrow more than they could afford with shorter tenures allowing them to buy better cars. However don’t fall for this trap, buy within your means if you can afford it at all. That way you will enjoy your new set of wheels without falling into bankruptcy.