So, you decided you want to buy a vehicle and are unsure what to get. There is no shortage of options out there but if you have bad credit, you’ll want to read this.
First off, if you have bad credit, you are probably going to be paying higher interest which is completely fine. This give you a chance to rebuild your credit, establish a relationship with a lender, all while driving a reliable vehicle (hopefully).
if you get a higher interest car loan (>7%), you’re going to want to trade that vehicle in as soon as you qualify for a better interest rate. Many lenders have loyalty programs that allow you to trade in for a significantly lower interest rate once you’ve made a minimum of 8 months of payments on time.
If that’s the case, you’re going to want something that holds it’s value to make sure you don’t have negative equity when it comes time to trade it. Negative equity is the difference between what your vehicle is worth and what you owe the bank. For example, if your vehicle is worth $25,000 and you owe the bank $30,000, you have $5,000 negative equity. The negative equity will need to be added to the new car loan unless you have the cash to cover the difference.
As a rule of thumb, you should stay away from most new vehicles. New vehicles can depreciate up to 30% as soon as you drive them off the lot. If you are planning on trading the vehicle in after 8 months, you could end up with too much negative equity.
Vehicles that are 2-3 years old seem to be the sweet spot. Someone has already paid the off the lot deprecation on them and you can usually pick one up for a good deal.
You want to stay away from luxury vehicles. Luxury vehicles are usually sold for a premium but when it comes to trading it in, you don’t get near what you paid.
Brands that hold their value and work well for high interest loans are: Hyundai, Nissan, and Chevrolet.
For example, a brand new Nissan Altima goes for around $28,000.
You can get a 2-3 year old one (same model) for around $15,000-16,000. You could drive that vehicle for a year and trade it in for roughly $11,000 – $12,000. You would owe roughly $13,000 – $14,000 and have very little negative equity.
In that example, you could trade in the vehicle for something with lower interest and transfer the negative equity to the new, lower interest loan. This would allow more of the payments to go to the principle and less to the banks.