Guaranteed auto loans are one way for individuals with poor credit or low income to purchase a car. However, this type of loan comes with distinct disadvantages and should be entered into with caution.
What Is a Guaranteed Auto Loan?
A guaranteed auto loan is a personal loan for a car purchase that is offered to individuals with poor credit history, who have little or no credit or who have very low income. All of these circumstances can make it difficult to secure an auto loan and a guaranteed auto loan might be the only way to purchase a car and build up positive credit for these individuals.
Deposit Rates
One of the largest disadvantages to this type of loan is the huge deposits that are usually required as down payment. Standard down payment rates for auto loan range from 5 to 10 percent of the purchase price of the car. This means that for a car that has a purchase price of $20,000, the deposit would be approximately $1,000 to $2,000. However, with a guaranteed auto loan, it is not at all uncommon for a deposit of up to 20 percent of the purchase price to be required. Using our example of a $20,000 car, this would mean a deposit of approximately $4,000. Unfortunately for many people, if you are in need of a guaranteed auto loan, it is unlikely you will have $4,000 available to make this kind of large down payment.
Interest Rates
Another disadvantage of guaranteed auto loans is the interest rate that is usually charged. If you have good credit, you can usually go to your local bank or credit union and find a better interest rate than those that are offered from the auto dealership. However, for people who find themselves in need of a guaranteed auto loan, there is usually little room to negotiate interest rates that are charged for this kind of loan. While car rates are currently extremely reasonable, interest rates for guaranteed auto loans are regularly in the 10 to 12 percent range and higher. This means a substantially higher monthly car payment, which again places the person taking the loan in financial difficulty if they cannot afford a huge monthly car payment every month.
Late Payment Penalties
With regular auto loans, the late payment penalty is usually somewhere around $10 to $20 and while it is not a good thing to be occasionally late with a car payment, it might happen from time to time. However, people with guaranteed auto loans pay a hefty and punitive penalty if they are late on their monthly payment. Since there is no government regulation on late payments, it is not unheard of for a late payment penalty to be charged of $200 or higher per incident. For individuals who are in financial straits in the first place, (which require obtaining a guaranteed auto loan because of problematic finances,) these kinds of penalties are a burden and designed to make borrowers make every attempt to avoid being late if at all possible.
Guaranteed auto loans are an option to help build positive credit for individuals with poor credit or inadequate income. However, they come with distinct disadvantages and should be entered into with caution.
