What to Look For (And Look Out For) in a Good Auto Loan Agreement

Red and silver pen sitting on top of a white, blue, and orange car loan application form

For those with bad credit, finding a good deal on an auto loan can be a serious pain. Often one might encounter complications like high interest rates, heavy down payments, or hidden clauses in contracts with private lenders or certain car dealerships. For many, these can lead to a substantial financial burden later on down the road well beyond the cost expected at signing.

In many cases, those who can’t find a good auto loan may be better off trying one of the buy here pay here car lots in Ohio. There, consumers can both find a good used car and work out a financial deal specifically crafted for those with bad or little credit.

And, as with all lender agreements, it’s important to look for a few key things in your auto loan agreement in order to make sure the deal is as fair and affordable as possible for you.


Low Interest Rates


This may not always be that possible when dealing with lender specifically marketing to those with bad credit, or if you have exceptionally bad credit yourself, but try to find the lowest interest rates you can. Obviously, the higher your rates, the more you will end up paying in the long run.

There are, however, a few ways you can work out manageable interest rates with your lender. Consider paying a greater amount in your down payment up front; not only will this reduce the amount of principle to which interest can be applied, but you may also help inspire confidence in the lender as to your financial stability.

Everybody wants low monthly payments, but this can actually end up costing a lot more in the long run since interest will be applied to a greater amount of principle for longer. While it might be a pain to make high regular payments, it just may be the smarter financial move overall to try to pay off more of your loan sooner rather than drag it out.


Make Sure it’s Finalized


Sometimes, a lender may try to convince a borrower to sign a “conditional” loan agreement, which basically means they unofficially approve a borrower at a certain interest rate, only to increase that rate at a later date. Since the interest rate is never fixed in the contract, this can lead to the borrower paying much more in monthly payments than anticipated. The Federal Trade Commission calls these “yo-yo scams,” and they are a quick and surprising way to find yourself in debt and at the mercy of a dealer.

Don’t sign any loan contract until you know that the deal is finalized. This means that your interest rates, principal, and monthly payments are set in writing and cannot be changed for the duration of the loan. This ensures your safety as a borrower that you won’t be faced with sudden unexpected increases in your payments due.


Know Your Collateral


In some loan agreements, the lender may require that the loan is “secured,” or backed by some collateral put up by the borrower. This is almost always the vehicle on which the loan is taken out, and so if you fail to make your monthly payments the dealership may repossess the vehicle. Unless your credit is really bad, it is unlikely you would need to put up further collateral, like your house or other property, but this is a possibility as well.

This may not be possible for those with bad credit, but often it is preferable to find an “unsecured” loan, or one with no collateral and which is supported only by the borrower’s credit. This involves a good deal of trust between a consumer and a dealer, but is a significantly less risky investment.


Look for Unusual Terms and Clauses


In some auto loan agreements, lenders may try to sneak in often-overlooked clauses to change the terms in their favor. These include things like acceleration clauses, which the dealer can invoke to force a borrower to repay the entirety of the loan immediately. This often requires the borrower being a few payments behind, but can present a serious financial hurdle for those already struggling if invoked.

These fluctuating charges can also take he form of a variable interest rate, which can change based on market conditions. Some dealers may try to sell this as a smart alternative to a fixed rate since a drop in market rates could mean cheaper payments for the borrower. This is usually a bad idea, however, given the unpredictability and speed of market changes. In most cases, borrowers are likely going to be facing increasing rates as the market changes. It’s best to negotiate a fixed interest rate, even if it’s higher  since the security is worth the extra cost.

That being said, it’s also important to be aware of additional costs and fees a dealer might add to a financing deal, including final closing costs on the vehicle and financing fees for the cost of the financial transactions. These can be added into the amount you owe without explicitly going toward your vehicle, and should be discussed before anything is signed.


Don’t Be Fooled by Fancy Financing


Some lender may try to entice a borrower with options that sound good on paper, but don’t actually work out in the borrower’s favor in the end. These include options like a balloon payment structure, in which a borrower pays lower interest rates with the promise of paying a single large sum near the end of the term.

This might be attractive to those looking for monthly payments, but can often cost more money in the long run. Given the rate of depreciation on used vehicles, a borrower paying a balloon payment may him- or herself owing more than the vehicle is worth. For the same benefit but with actual effect, a borrower can make a larger payment up front – this goes towards more of the principal and will actually lead to lower payments each month.

With these tips, consumers with even terrible credit stand a good chance of finding a decent car loan. With luck, you’ll be a smarter consumer with a better eye for a good deal – and on the road in no time.