Before we kick off this article in earnest, we have to break some bad news, which you’re probably already aware of: as fun as they are, cars don’t come cheap. To be honest, fun isn’t even a big enough word to describe the myriad opportunities offered to you by possessing a car. Quite apart from the fact that they’re liberating, and provide you with the ability to do what you want, when you want to do it (within reason, naturally), for many of us attempting to craft financially responsible lives for ourselves, they’re a bare necessity.
Unless you live in a highly-developed, major urban city with terrific public transport facilities, it’s a pretty safe bet that you’ll need a car; not just to get around, but to even make acquiring a stable source of income possible in the first place. While it’s nice to think that we don’t need cars, the fact of the matter is that in today’s world, it’s simply not possible for most of us to get by without them.
Following on from that point, just as it’s improbable that the majority of us can survive without a car, so too is it unlikely that most of us will be able to save up enough money to pay for the entire machine upfront. That’s just not realistic for the vast majority of hard-working people. If that’s the situation you find yourself in, just like it’s the situation most of us have found ourselves in at some point or another, you’re going to need to get approval for a bad credit car loan in order to finally start including an automobile in your daily existence.
What Can I Afford?
While this is no mean feat in itself, it’s made even more complicated by the calculations you’ll need to perform in order to work out how much you can even afford. Bad credit car loans, like all loans, are predicated on the idea that you, the buyer, is reliable enough for them, the lender, to essentially give you money for free on the understanding that you’ll pay them back according to the terms the pair of you negotiate. Since it’s a lot more involved than simply giving them your solemn promise, society has come up with a single number which represents, mathematically, the likelihood of you paying back the money you owe in full and on time.
This magic little number is called your credit score, and it is only composed of three digits, all of which are crucial for securing your bad credit car loan. Don’t be fooled by the unimpressive size, though: highly paid actuaries have poured hours and hours into refining their algorithms for calculating these numbers so that they can more accurately reflect the risk incurred by the person loaning you the money. As it happens, they’re still refining them; every day there’s mathematical progress made on the ability to better predict something as abstract as any given person’s likelihood to behave in a financially responsible manner.
Your credit score is going to determine a significant proportion of the overall bad credit car loan deal you’ll eventually be able to secure for yourself. The terms of that deal, in turn, are going to go a long way to deciding how much of your monthly income you should dedicate to your bad credit car loan. Therefore, in the following article, we’re going to discuss how your credit score may affect your loan terms before we get around to giving you hard facts about how much of your monthly income you can portion off towards paying back your automobile loan.
After all, you don’t try to run before you can walk, do you? That’s just common sense, something we here at HamiltonBadCreditCarLoans.ca are big fans of.
(N.B.: If you did try to run before you can walk, we’re impressed and terrified in equal measure.)
With all of that preamble out of the way, let’s get down to hashing out the specifics of how much of your monthly income you should plan will go towards repaying your bad credit car loan.
How Does Credit Affect Your Bad Credit Car Loan?
There are two main ways your credit score is going to affect the terms of the bad credit car loan you’re able to negotiate. The first of these is the interest rate you’ll be offered, while the second is how long the bad credit car loan needs to be paid back for. While each is as important as the other, they factor into the overall picture in completely different ways, so we’ll discuss each one briefly before giving you the single biggest tip you need to figure out how to apportion your finances appropriately.
Interest rates are essentially a mathematical way for the lender to safeguard themselves against the risk incurred by giving somebody else money for nothing. Unlike the common misconception you see perpetrated around the web sometimes, interest rates don’t actually go towards the value of the car. At all. Any money you pay in interest is basically to ease the mind of the lender, to put it simply. Calculated based off of the credit history you’ve proven yourself able to handle, the higher the interest rate you’re offered, the less they trust you. You shouldn’t take this personally—there’s hardly anything on Earth less personal than these cold, beautiful equations that have been developed to figure out how trustworthy you are.
More interest is going to come about as a result of a poorer credit score, and will result in the total value of the bad credit car loan increasing in proportion to the fact that you’ve proven yourself, historically, to be a less than perfect person to loan money to. A lower interest rate, on the other hand, proves that you’re solid, in financial terms, and as such the lender isn’t taking on nearly as much risk by giving you the money—it’s more or less a sure thing that you’ll pay it back.
To give a quick example that illustrates this point, consider the fact that Prime and Superprime-level buyers (which typically encompass credit scores from 700 up to the perfect, coveted 850, although every lender calculates these ranges differently) can expect rates of less than 5%, while the worst credit scores may well cost you up to 20% of the total value of the car added on top of the monetary value you’re paying back. The takeaway here is that the lower the interest rate you’ll get, the more trustworthy you are: and the more trustworthy you are, the lower the interest rate you’ll be offered.
Loan terms, on the other hand, also play a huge part in calculating the overall value of the bad credit car loan. To explain what we mean by this, it’s important to understand that cars are depreciating assets. No matter how fun they are, the second you buy them they begin to get steadily less valuable. That’s just the nature of the beast, and has a lot to do with the fact that they will inevitably encounter faults at some point or other, and those faults are going to require even more money to keep the thing running.
This is where the length of the bad credit car loan comes into play. A shorter-term loan is always more preferable than a longer-term one, even if the monthly payments are slightly higher. To understand why, imagine that you’ve bought a car for a 60 month loan repayment scheme. Next, picture that the car breaks down around month 52, and you need to stick it in the garage for a couple weeks before it’s back to being road-safe. In this instance, you’re actually paying to repair a vehicle you don’t even own yet.
On the other hand, if the bad credit car loan term was 48 months, by the time your pride and joy encounters a problem in month 52, you already own it. We’re sure you’ll agree with us when we say it’s a lot more enjoyable to pay to repair an item that’s actually yours. After all, what’s the point in fixing something for somebody else, with your own money?
Now that we understand that the most desirable loans have lower interest rates and go on for shorter periods of time, we’re going to give you the single biggest tip you’ll need for figuring out how to structure your monthly finances. This is commonly known in the industry as the 10% rule, and while any general rule of thumb isn’t going to be perfect for every single situation, it’s more than a good enough place to start.
The 10% Rule
The idea is that most people can’t afford to pay more than 10% of their income for their car repayments. This also takes into account the 33% rule of thumb about rent, which says that you shouldn’t pay more than a third of your wage towards your rent bill, plus the 20% rule about saving, which states that ideally you should be attempting to save at least a fifth of your income. If your bad credit car loan deal is going to cost you more than a tenth of all the money you make, it’s time to either shop around for a better one or maybe opt instead for a less expensive automobile.
Of course, another way to increase the amount of money you’ll be able to pay for your car is by performing credit repair techniques to boost your credit score enough to make a difference. After all, the higher your credit score, the lower the interest rates you’ll be offered, and the shorter the overall loan repayment scheme is going to wind up lasting.
If you have a car in mind that you want to buy, but with the bad credit car loan deal you’re offered and the current amount of money you make it adds up to more than 10%, imagine how much better it could be if you were simply able to boost your credit score enough to qualify for the next tier of buyer trustworthiness.
Credit repair usually doesn’t involve anything more serious than simply paying back what you owe in full and on time. Following that simple rule will keep your score healthy, even if it’s already at an impressively high figure. If you don’t fancy credit repair and you’re desperate for that particular model of car, go ahead and commit to the bad credit loan that’s going to cost you more than 10%, but be fully aware when you’re doing so that you’re potentially committing to a financially irresponsible course of action that may not be so easily remedied in the future when the chickens come home to roost.
There you have it. The single most important rule to keep in mind when you’re considering your bad credit car loan is that you shouldn’t commit to more than 10% of your total income going towards the loan. You can make things work by improving your credit score, which is going to lower the interest rates your offered as well as shorten the amount of time you need to pay back the loan.
If you’ve been having a hard time securing a car loan because of your less-than-ideal credit score, why not get in touch with the team here at HamiltonBadCreditCarLoans.ca? No matter what your score is, we consider every single application for a loan we receive.