While no one wants to have bad credit, it's not a choice you can control as easily as others. It takes years, sometimes even decades, to undo the financial mistakes that cause bad credit. But the good news is, if you want to shop for car loans, you will find options.
For quick and simple information about bad credit car loans, here's a quick list of pros and cons:
Pro: You're Approved!
When major banks turn you down, at least you can take solace in the fact that you've been approved for a loan by a lender. This may not be what you want to hear, but it's absolutely true from the perspective of the lender, who is taking an extreme amount of risk.
Con: Higher Than Average Interest Rates
If those with prime credit scores receive the lowest rates, it's clear that those with subprime credit scores will receive the highest. And due to the increased risk, lenders have to charge at rates that are typically well above the average in order to offset that risk. This is because it's likely many of the people they lend to will default.
Loaning to subprime car buyers the same way you would a prime buyer would likely put a lot of lenders out of business.
Pro: It Can Help Your Credit Down the Road
Initially, acquiring new debt will hurt your credit score. But as time goes on, your payment history will have a much more positive image, and you'll have paid down your debt more, the credit bureaus will take notice.
Slowly but surely you'll see your score rise each and every month you check. As you're seen more responsible with credit, it should also be easier to acquire other types of credit. It will also make other essential parts of life less difficult, such as renting an apartment/home or buying a cellphone with a service contract.
Con: You Could End Up Under Water Easily
Because of the high interest rates, it's easy to end up under water in a bad credit car loan if you're not careful. What this means is, you will owe more on your car than it is worth on the open market.
The best way to prevent this is to pay a percentage of the car's total price up front as a down payment in order to lower the overall monthly payment. This will also allow you to avoid higher interest charges that will quickly catch up off guard if you pay nothing up front.
It's not unusual for a bad credit car shopper to find themselves in this type of situation, so it's good to be aware of it going into the process instead of being surprised down the road.
In the end, you have to ask yourself if taking on a bad credit car loan is best for you at this time. If you really need a car and know you'll have the ability to pay it back and get yourself out of debt on time, it's worth it to have that security. But if you're unsure of where your next paycheck will come from, you might want to consider other options.