- A guaranteed car loan is a loan offered by a financial institution (often through a used car lot) that is "guaranteed" to anyone who wants to buy a car, no matter what their credit history. Used in this sense, the word "guarantee" means nothing more than that the owner of the lot will do all he can to give the buyer a loan as long as the buyer meets a couple of simple prerequisites. This contrasts with the traditional car loan, in which the buyer must meet a certain standard for financial loan agencies to consider offering money. These standards include place of employment, length of employment, income and--most importantly--credit history. For some, this final aspect makes it impossible to get a traditional car loan. This is why used car lots have begun catering to the poor-credit crowd with guaranteed car loans. If the buyer is employed and makes enough income to theoretically make the payments on the vehicle, the buyer will get a loan.
- The reason car lots can do this comes down to probability. Using statistics generated by the history of car loans and used car businesses, car lots can make accurate predictions regarding an individual's likelihood to default on a loan. With this information, they can adjust the terms of the loan to the point where their expected value--the amount of money they will make or lose over the long run--winds up in the black. To do this, however, generally means poor credit terms for the buyer. High interest rates make guaranteed loans an unwise choice for those with options, but they are helpful to those who need a vehicle but don't have the credit history to back them up.
- While they may put the buyer in an unwelcome financial situation, guaranteed car loans can do more than simply put the buyer in the front seat of a used car. By making regular payments and keeping up with the loan as intended, the buyer can begin to repair his damaged credit score. Banks look to this type of financial responsibility when deciding whether or not to extend credit. No matter what has happened in the past, any time an individual has a chance to prove himself with a line of credit, it is a good thing. The next time that individual goes to buy a car, he might have more appealing options when it comes to financing.
