Are guaranteed auto loans too good to be true?

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In a Nutshell

Guaranteed auto loans offered by dealerships might allow you to buy a car even if you have poor credit. Also referred to as no-credit-check loans, these loans usually come with high interest rates and fees that can lead car buyers to pay much more than they can afford for the car — or even more than the car is worth. Consider some alternatives, like shopping around or getting a co-signer, to save you the costs of guaranteed auto loans.

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Guaranteed auto loans may seem like a good option if you have low credit scores, but these no-credit-check loans can actually cause you to spend a lot more on a car than you expected.

The auto loan industry is a big business. More than 90% of U.S. households have at least one car, and auto loans are the third-biggest category of household debt. If you have good credit, you may find a lot of financing options available to you when shopping for a car. But if you have poor credit, a guaranteed auto loan may seem like the only way you’ll be able to purchase a car. This isn’t necessarily the case, though.

Before you sign a contract for a guaranteed auto loan, consider the drawbacks, including high interest rates. Explore other potential ways to get a better car-loan offer.


What are guaranteed auto loans?

Maybe you’ve seen offers for “guaranteed” auto loans, or loans with no credit check, at some car dealerships while out looking for your new ride. (They may also be referred to as “buy-here, pay-here” loans.) No matter the name, these are auto loans financed by the dealership and offered to those with low credit scores or limited credit history.

Lenders typically consider your credit history, including your credit scores, to assess their risk in giving you a car loan.

In general, the better your credit scores, the lower your car loan interest rate could be. According to credit bureau Experian, in the third quarter of 2018 borrowers with lower scores (known as subprime borrowers) paid an average interest rate of 11.9% on new cars, while those with higher scores (prime) paid an average interest rate of 4.6% on new cars.

Unlike other lenders, many buy-here, pay-here dealerships don’t consider credit scores when qualifying you for a loan. Instead, they typically look at your income, employment history and proof of residence. You’ll also likely need to make a down payment.

The dealership determines the loan amount you qualify for and then you can choose a car that falls within your loan range. After signing the loan agreement, you’ll make periodic payments (weekly, for example) in person at the dealership.

Things to watch out for with guaranteed auto loans

If you’re considering a guaranteed or buy-here, pay-here auto loan, it’s important to understand the potential drawbacks.

High interest rates

Buy-here, pay-here loans tend to have much higher interest rates and fees than those offered by other lenders. These loans may carry interest rates up to the 20% range and may also require the borrower to pay high fees.

Borrowing more than the car is worth

Lenders like banks and credit unions limit their loan amounts based on the value of the car you want to buy. When a dealership acts as a lender, it may loan you more money than the car is worth. This is more common with buy-here, pay-here dealerships. When this happens, you owe more on your loan than your car is worth as soon as you sign the paperwork and drive off the lot. This is commonly referred to as being upside down on your loan.

Building your credit

Buy-here, pay-here lenders may not report your payments to the major consumer credit-reporting agencies. That means that even if you make your payments on time each month, this loan probably won’t help you build your credit.

Getting the loan terms you think you’re getting

The lender might promise you a certain interest rate and financing, pending final approval, and let you take the car home. But then the lender might later tell you that the loan it previously promised you wasn’t approved, and you’ll have to pay a higher interest rate — all after you’ve already driven the car off the lot. To avoid this, don’t leave the dealership without finalizing the financing and signing paperwork — and make sure to read your loan terms thoroughly so that you’re not surprised later on down the line.

Other options to consider

A guaranteed auto loan may not be your only option if your credit needs some work. Consider some alternatives that could lead to better loan offers.

Waiting to purchase a car until your credit improves

Continuing to drive your current car, borrowing a car from family or friends, carpooling or taking public transportation could give you some time to improve your credit and save for a car down payment. Paying your bills on time and reducing debt are two of the main ways you can help improve your credit. With higher credit scores and a down payment, you’ll likely receive more loan offers with a lower interest rate, so it just might be worthwhile to wait.

And while you’re waiting, it’s a good idea to monitor your general credit situation by keeping an eye on your scores.

Borrowing less or reducing your loan term

If you’re willing to consider a lower-priced car, you may be able to get approved more easily for a loan with better terms. The same goes for a shorter loan term. A longer loan term will likely give you a lower monthly payment, but you’ll pay interest for a longer amount of time, which means paying more in interest overall.

Shopping around

Lenders and dealerships aren’t required to offer you the best interest rates, so the only way to know if you’re getting the best deal available to you is to compare multiple offers. Shopping around may also allow you to find lenders offering reasonable loan terms to people with little or poor credit. Some credit unions and lending companies, like OneMain Financial and CarFinance, look at factors beyond credit scores when considering loan applications. Carvana and CarMax also offer financing to borrowers with poor credit.

Finding a dealership with a special financing department

Some dealerships have a special finance department that specializes in getting customers with bad credit approved for car loans by working with a network of lenders. But like guaranteed or buy-here, pay-here loans, these loans also typically have high interest rates and may require a down payment.

Getting a co-signer

A co-signer with good credit could help increase your chances of loan approval and get you a lower interest rate. But getting a co-signer may not be easy. Co-signers take on substantial risk — they’re legally responsible for making payments on your loan if you can’t. Only get a co-signer if you think you’ll be able to keep up with your monthly payments — otherwise you could burn a bridge or put your co-signer’s credit in peril.

Keep reading: Can you get a car loan with bad credit?

Bottom line

“Guaranteed” auto loans are an expensive financing option that can cause car buyers to pay thousands of dollars more than a car is worth, so consider them as a last resort. Shop around and investigate whether a shorter loan term or smaller loan amount could help you get approved for a car loan with a lower interest rate.

If you have no choice but to get a guaranteed auto loan right now, focus on improving your credit. Once you’ve built up your credit, you could take a look at refinancing your car loan to get a lower interest rate.

Keep reading: 5 quick tips to improve your credit health