About Guaranteed Car Loans

Having bad credit makes it harder to acquire a credit card, home loan, car loan and a private student loan. But fortunately, some lenders offer fresh start programs, which allow bad credit applicants to obtain financing and ultimately improve their low credit score. Guaranteed car loans are designed to help people with a low credit score. They can obtain a vehicle loan, submit on-time payments and watch their credit score increase.

Function

Guaranteed car loans are essentially bad credit auto loans. Lenders who offer these types of loans don't care about credit scores. Therefore, it's possible to qualify for a vehicle loan with no credit history or bad credit. Banks, credit unions and auto dealerships rarely offer loan approvals to persons with a low credit score. To obtain a car, bad credit applicants need a co-signer, who becomes a co-debtor and equally responsible for the loan; or they have to purchase the vehicle with cash. Guaranteed car loans remove this headache, and give bad credit applicants the opportunity to purchase a decent automobile and re-build their credit.

Time Frame

The time frame or term on a guaranteed car loan varies. The typical car loan term is 60 months or 5 years. However, borrowers can select a shorter term--perhaps 2, 3 or 4 years. Longer loan terms reduce monthly payments, and allow borrowers to afford a more expensive car. However, a longer term also results in additional interest payments and borrowers ultimately pay more for their vehicle. On the other hand, some auto loan lenders offer a reduced rate on shorter loan terms.

Benefits

A guaranteed car loan is ideal for anyone with no credit history, and for people who've experienced a major credit mishap such as bankruptcy or foreclosure. Both can severely damage a person's credit history; and the only way to re-build credit is to open new lines of credit. Since it's difficult to qualify for personal loans and credit cards with bad credit, a guaranteed car loan is the next best thing. Most lenders offer instant approvals, and the loan requirements are minimum. Borrowers need stable employment, and they must be in a financial position to repay the loan.

Warning

Guaranteed car loans can help a person establish or re-establish their credit history. However, because the average applicant doesn't have a good credit history, these loans involve high finance fees. Whereas a good credit applicant may qualify for an auto loan and receive a six or seven percent interest rate--a person with bad credit may receive an interest rate up to 20 percent. A higher interest rate significantly increases monthly payments and limits a person's buying power.

Expert Insight

Before applying for a guaranteed car loan, compare lenders and loan rates. Contact an auto loan broker and obtain a pre-approval. A pre-approval lets you know how much you can afford to pay. This saves times because you don't spend your days test driving cars outside your price range. What's more, a pre-approval can function as a loan quote. It'll include information such as the estimated interest rate and monthly payment based on a maximum amount you're allowed to borrow.