Why Dealers Charge A Higher Rate on a Bad Credit Auto Loan

It is an obvious fact that a number of individuals have a bad credit score. Moreover, the recent economic crisis must have certainly increased that number. However, there are lenders and dealers who are ready to provide a bad credit auto loan to individuals with bad credit score. The application and the working of the loan are similar to the conventional loans but it is seen that the interest rate charged to these applicants is usually higher than the regular. This occurs due to two reasons. The first is that the lender/dealer is dealing with a riskier group of borrowers and wants to cover his/her finances as soon as possible. There might be cases when the borrower wants to go for complete financing which further increases the risks of default.

The other reason (which is seen the most) is that the dealer wants to earn profit on the misery of the applicant. These dealers know that the applicant is left with very few choices (at least the applicant thinks that). Therefore, the power of negotiations and interest rate is in the hands of the dealer and he/she can charge whatever rate he/she wishes to.

When the dealer forwards the application of the borrower to the lender, the lender replies back with what rate should be charged to the borrower. For example, the lender states that the best rate is 8%. Then the dealer marks up this rate by five to six percent which is his/her profit percentage. This mark up usually results in a number of cases of defaults as the borrower ends up owing more money than what his/her car is worth.

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