Current economic downturns are making sales lots desperate to move products. Zero percent financing, drastic reduction in sticker prices and upgrades in accessory packages are all ways car salesmen can push vehicles. Another way many lots are ensuring increased sales is through special finance auto loans.
Special Finance Auto Loans Good for Car Lots
Many companies that sell vehicles are seeking relationships with lenders that are willing to dip into sub-prime markets. The ability to market to individuals who would not be able to finance a new or used vehicle under traditional lending arrangements opens the customer base for a car company.
Car companies also receive money from the lender regardless of credit risk. For a car salesman, a sale is a sale regardless of financial arrangements. Some lenders even offer benefits to the car companies for bringing consumers into the financial arrangement.
What are the Benefits for the Consumer?
Despite popular wisdom from financial experts and talk-show hosts, consumers can benefit from special finance auto loans as well. Although these loans come with higher interest rates than traditional financing, they allow individuals with poor credit or bad financial situations to obtain what may be a necessary vehicle. Possible benefits of special finance auto loans can include:
Ability to purchase a vehicle necessary for work;
Increased credit score as individuals pay on new auto loan; and
Ability to fix a bad vehicle situation by trading in a car that has negative equity.
What are the Risks of Special Finance Auto Loans?
Although there are benefits to special financing arrangements, customers should be wary of deals that are too good to be true. When lenders provide loans for those with poor credit, they will hedge their bets. This means individuals will pay additional fees or interest. Loans that do not appear to come with increased interest may have hidden variables.
Consumers should carefully read all paperwork associated with their loan. If the interest rate is much lower than expected, individuals should ensure the interest rate is locked and will not fluctuate or balloon at a later date. Some people fall into the trap of accepting loans with small monthly payments only to lose the vehicle later when increased payments cause them to default.
Who Should Accept Special Finance Auto Loans?
Special financing can allow a person to obtain a vehicle when no other avenue would do the same. In certain situations, this makes special finance auto loans attractive. However, this type of loan should be a last resort for someone who needs the vehicle in order to work or provide daily living essentials to their family. High interest financing options should never be used to replace a working vehicle with a newer model or purchase a fun vehicle without necessity.