Young couple driving away in new car Young couple driving away in new car
Young couple driving away in new car

When applying for a bad credit car loan, you may be faced with higher interest rates. Lenders see lending to people with bad credit as a risk and to make sure that the risk is worth it, they often charge higher interest.

Lenders look at risk when they loan money and the way that they make their money is from interest. If there is a higher risk that they won’t get their money back, then they raise the interest rates to compensate. Likewise, a lower risk usually has a lower interest rate.

When understanding interest rates for bad credit car loans, anything that adds risk to the lender will usually add to the interest rate. Luckily, the opposite is also true. Anything that lowers the risk will allow the loan to go through with lower interest rates.

What are interest rates?

Interest rates are usually a percentage of the initial amount loaned, called the principal. As the start of your loan, you’ll notice an increase of 10% normally every month, meaning your payments don’t bring down the total quite as much as expected. As you make more payments, the amount added onto your total will get smaller.

If lenders didn’t have interest rates or fees on their loans, lending money wouldn’t create any profits and wouldn’t be a viable business. As long as there is a need for lenders, there will be interest.

How your credit score impacts your interest rate

One of the simplest influences on your interest rate is your credit score. Having bad credit is seen as more of a risk to lenders. The lower your credit score, the higher the interest rates. On the other hand, an application with a good credit score is less of a risk and will have lower interest rates.

With bad credit, interest rates on a car loan can be anything from 10% to 20% of the loan. Some lenders will charge the maximum advertised rate.

If you are thinking of getting a bad credit car loan, it’s worth trying to improve your credit score first. Improving your credit score before applying can save you thousands of dollars over the life of the loan.

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Stable employment is a must for a bad credit loan

Your credit score is a measure of your past but most bad credit lenders know that things can turn around. Though your credit score will play a part, it’s not the whole story. Having stable employment can be part of the criteria for lenders as it proves your ability to pay back your debt.

The longer you have remained steadily employed, the better. Proving that you can pay back your debt with a steady income reduces the risk of the lender.

The type of employment can affect your interest rate as well. Self-employment is seen as a higher risk and requires more proof of stability to keep interest rates low.

If you want to give yourself the best interest rates, try to ensure that you have steady employment for as long as possible. If you are a casual employee, you might try to go part-time or full-time so that you have a more reliable income before you apply.

Six months of regular employment or 12 months of self-employment is often the requirement for application but longer employment can lower your risk.

A guarantor can also help your borrowing power

Another way to lower the risk to the lender is to have a guarantor sign on to the loan.

A guarantor is someone who agrees to be legally responsible for your loan and they act as a backup if you cannot make your repayments. If everything goes well and you’re making your repayments on time, then the guarantor shouldn’t need to be contacted.

Though a guarantor reduces the risk for the lenders, it is still a risk for the guarantor themselves. They are putting themselves at risk of going into debt by signing on. It’s important if you are thinking of having someone be a guarantor that you both get independent financial advice before agreeing to anything.

Secured or unsecured car loan. Which is best?

In a similar vein as a guarantor, agreeing to a secured car loan can also lower the risk for the lender meaning your interest rates will be reduced as well.

A secured loan uses collateral to minimise risk for the lender. With car loans, the car you’re purchasing is often used as collateral. Should you default on the loan or fail to make repayments as per the agreement, they can take your vehicle and sell it off to make up for their losses.

An unsecured car loan uses no collateral and is riskier for the lenders which will raise the interest rate on the loan.

Consider your ability to repay your loan carefully before applying. If you are sure that your budget will be able to finance a car loan, then using a secured loan may be the best option for you. They can take a little longer to get approval, but having collateral increases your chance to get approved at a lower interest rate.

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The length of your car loan will also influence your loan rate

The longer the term of your loan, the more money you will be paying to the lender.

Often, short loans have higher interest rates than longer ones, but you can easily pay more in interest over the course of a long-term loan. This is most obvious with a mortgage, which although you only a few per cent in interest, it often ends up being a six-figure fee by the end of the payments.

If you’re looking at the length of your loan, check the difference between the amount you’d pay in interest on a shorter term against a longer term. Just like getting the loan in the first place, it may be easier for you to pay more money in smaller instalments as opposed to paying off a small debt with much larger repayments.

Consider the age of the car you wan’t to buy

In general, new cars will have lower interest rates than used cars. Part of this is because used car loans tend to be smaller and shorter loans. The other part comes from the worst-case scenario. On the small chance that the loan defaults and the car is repossessed, a new car is a safer investment than a used car. Selling it has a better chance of covering their losses if the car is new.

There are lots of factors that can affect the interest you pay on a bad credit car loan but at its simplest, it comes to the risk for the lender. Anything that creates risk for the lender will be reflected in your interest rates. More risk, higher interest.


Ready to take control of your financial future? Look no further! At Ume Loans, we specialise in providing solutions for individuals with less-than-perfect credit. Our dedicated team is here to help you secure the loan you need, tailored to your unique circumstances. Don’t let bad credit hold you back any longer—take the first step towards financial freedom and speak to our lending specialists on: (07) 5443 3863