Auto Financing Options Grow For Borrowers With Low Credit Scores
Auto financing options are becoming more prevalent for auto buyers with low credit scores. Unsecured auto loans and auto financing for people who have a bad credit history is available from financial institutions that approve auto financing online and on the local market.
"It's definitely a trend," said David Owers, managing director of auto lending at Wells Fargo. "I think it started in the used-car side and we will continue to see it move into new automobiles."
The terms of unsecured auto loans through Wells Fargo typically require borrowers to provide some form of personal collateral such as a savings account or certificate of deposit, although few borrowers actually end up turning over their collateral to get the loan, he said.
Still, auto loans are not for everyone, according to Owers. He said auto buyers should make sure they understand what they are getting into when it comes to auto financing before signing on the dotted line.
For instance, auto loans can stretch out payments over several years and have higher interest rates than home mortgages or credit cards. Before taking out an auto loan, consumers should ask themselves how much money they have saved up to put toward a down payment.
"You want to take care of any big ticket items before you go into auto financing," he said. "If you have auto financing, what are you going to do about your furniture?"
But for people with bad credit history -- especially young adults just starting their careers -- auto loans may be the only option. That could end up hurting their credit scores since auto financing can add to a person's debt load, said Nola Aigner, director of financial literacy education at Money Management International. It's always advisable to meet with a professional and discuss all of your financial options before applying for a mortgage loans, personal loans or auto loans, to ensure you are not borrowing more than you can afford.
"If they are making those auto payments but don't have any money left over for anything else and they start to use their credit cards or take additional out on their auto loan -- if you don't have your basic needs covered it really takes a toll," she added.
For people with low credit score, buying an automobile often requires the help of co-signers who will take responsibility for making sure that auto payments get made. This also helps them qualify for auto loans by lowering the bar of credit score they need to get auto financing.
"In some cases, you can get a co-signer and often times it's a parent," said Owers. "We have a product where a student comes in with their parents and we will actually allow the parents attestation of income so if the student has no credit history we'll consider them for auto finance."
In most cases, that means Wells Fargo will look at both the borrower's application as well as the co-signer's information although co-signers are not obligated to help out if something goes wrong, he added.