Knowing what type of loan you are betting before you sign on the dotted line can make a big difference particularly if you are financing your vehicle with a bad credit car loan.
Know before you go
Our business is to match up our credit challenged customers, who have filled out our bad credit auto loan application, with dealers in our nationwide network that can help them get this kind of a loan. By doing this, applicants at Auto Credit Express can not only reestablish their car credit, they can also raise their credit scores.
We also provide our applicants with much of the information they need in order to make an educated decision on how to approach the auto credit repair process, since a poor decision could result in some negative consequences – trapping them in a loan they can’t afford which could end up lowering their FICO scores even further.
The worst result would be repossession. Once this happens, the only remaining choice for most buyers is a Tote the Note, We Finance Everyone car dealer. It also means that rebuilding their auto credit has to be put on hold for at least a year, since most lenders that offer auto loans for bad credit will only consider approving applicants with a repossession that’s more than a year old.
One of the keys to a successful bad credit auto loan is an understanding of the basics. In this case it means that whether you are getting a bad credit car loan or a conventional car loan, you need to be aware of the types of car loans in today’s market.
The simple interest loan
This is the most common type of car loan. With a simple interest loan, you are charged interest each day on the balance that you owe. In fact, if you make your monthly payment early (on the 2nd of the month versus the 15th), you will be paying less interest over the life of the loan since the daily interest charges (based on the balance) will be less. If you decide to repay the loan early, your interest payments and the overall interest expenses stop at that time. The payoff price at that time would include the original price of the car plus the total of the daily interest charges to date, minus the payments you have made. In other words, there is no penalty if you pay your car off early.
Rule of 78’s (pre-computed) Loan
This method is not used nearly as much as it used to be and for good reason. With modern disclosure laws relating to finance contracts, most people would not sign on the dotted line if the interest expenses on the loan were computed with the rule of 78’s. With this type of loan, the interest is computed using amortization tables. This determines the amount of interest charged over the period of the loan and includes a percentage of interest with each payment. Typically, you will pay ¾ of the interest charges in the first ½ of the loan term. If you pay the loan off early, the lender will “rebate” part of the interest, but you will still end up paying more interest than if it were a simple interest loan.
How do I know what type of loan I’m getting?
In 1992, Congress outlawed the use of “rule of 78’s” for all closed-end (fixed final payment date) loans over 61 months in length. The following states also outlawed “rule of 78’s” loans for loans 60 months and less: Arizona, Delaware, Idaho, Iowa, Kansas, Maine, Maryland, Massachusetts, Michigan, Minnesota, Nebraska, Nevada, New Hampshire, New York, Oregon, South Dakota and Vermont.
If you live in any one of the other states, be aware that most conventional lenders offer only simple interest loans. However, some subprime lenders as well as many buy here pay here and tote the note car lots still use the “rule of 78’s” to compute the interest on their bad credit car loans.
To avoid signing up for a rule of 78’s loan, be sure you read your finance contract thoroughly. If it has the words “refund” or “rebate of interest” or if the wording in the “prepayment” portion does not state “no penalty”, it is not a simple interest contract and you should stay away from this type of loan if at all possible.
The Bottom Line
Here at Auto Credit Express we specialize in placing customers with bad credit with dealers that can help them. Our affiliate dealers are knowledgeable and will treat you with the same high respect that they treat every customer that walks through their doors. If you have any questions that our web site can’t answer, feel free to call us at the toll free number listed there.
So if you are serious about getting your credit back on track, why not begin a new chapter in your life by filling out our bad credit car loan application.
