What Are Guaranteed Auto Loans?

If you’re having a hard time getting approved for an auto loan due to a poor or limited credit history, a guaranteed car loan may be worth considering. Guaranteed auto financing is typically offered by buy here, pay here dealerships instead of traditional lenders.

But while this type of financing comes with less stringent requirements, the costs and risks can be high. Here’s what you need to know.

Risks of Guaranteed Auto Loans

Loans Are Expensive

Buy here, pay here loans are typically more expensive than traditional auto loans, both in terms of interest and fees, including exorbitant late fees and other penalties if you miss a payment.

Even if you opt for a less expensive vehicle, the monthly payment can still be a significant financial burden, especially if you’re on a tight budget. If you take on more than you can afford, you may be at risk of defaulting on your loan.

What’s more, a high interest rate means that a large chunk of your monthly payment goes toward interest charges instead of paying down the principal balance. As a result, there’s a greater chance that the car will depreciate at a faster rate than you can pay down the balance, increasing your odds of having negative equity in the vehicle.

Dealers May Be Quick to Repossess

Both traditional and guaranteed auto lenders can repossess your vehicle if you stop making payments. But in general, buy here, pay here dealerships often resort to seizing your vehicle more quickly than other lenders.

While traditional auto lenders may wait two or three months before initiating repossession, some guaranteed auto loan dealers may start the process after a single missed payment.

It May Not Help Your Credit

While dealers that offer guaranteed auto loans may market their financing as a way to rebuild your credit, many of them don’t report your loan balance or on-time monthly payments to the national credit bureaus.

That said, they may report negative items, such as late payments and repossession, which can damage your credit significantly.

Alternatives to Guaranteed Auto Loans

While a guaranteed auto loan may be tempting, the risks may outweigh the benefits for many car buyers. Here are some potential alternatives to consider:

Get a Cosigner

You may qualify for a traditional auto loan if you apply with a creditworthy cosigner. The cosigner agrees to make payments if you can’t, reducing the risk you pose to the lender. As a result, the lender will consider both credit histories to make a decision.

Work with a Bad-Credit Lender

There are several online lenders that specialize in working with car buyers who have poor or limited credit. Take some time to shop around and compare several options to get an idea of what you qualify for, so you can avoid borderline predatory lending practices.

Wait to Improve Your Credit

If you don’t absolutely need a new car right away, consider taking time to improve your credit before you apply for a loan. Start by checking your credit score and credit report to get an idea of where you stand and which areas you can address.

Buy a Less Expensive Car

Some traditional lenders may be more willing to work with you on a smaller loan. Depending on how much cash you have, you may be able to avoid the financing process altogether by buying a less expensive vehicle outright.

The Bottom Line

Guaranteed auto loans offer people with limited or poor credit an easy path toward car ownership, but they can be costly and make it difficult to improve your credit history. Before you consider working with a buy here, pay here dealership, carefully research all of your options.

Regardless of which path you pursue to buy a car, monitor your credit regularly to better understand how your credit score works and how your actions affect your overall credit health. Over time, developing good credit habits can increase your credit score and make it easier to qualify for affordable credit when you need it.

Contact O1ne Mortgage for Your Mortgage Needs

At O1ne Mortgage, we understand the challenges of securing financing, whether it’s for a car or a home. Our team of experts is here to help you navigate the mortgage process and find the best solutions tailored to your needs. Call us today at 213-732-3074 for any mortgage service needs. Let us help you achieve your financial goals with confidence and ease.