People who have bad credit are often taken for a ride by unscrupulous auto loan providers. The most common tactics, including inflating the interest rate and extending the repayment term, can have a person spinning his wheels instead of driving home into debt-free living.

Life is full of consequences. One consequence for someone with bad credit is a limited number of financial options, many of which can leave him in worse shape than before he attempted to clean up his act. This applies particularly to bad credit auto loans. Here's what can be expected, and what should be avoided:

Paying more for less

Bad credit auto loans include higher interest rates, require greater down payments, and need to be repaid faster than conventional loans. While the specifics of each factor depends on just how tarnished a borrower's credit happens to be, expect interest rates on the loan from 7 to 18 percent, down payments of 20 to 50 percent, and repayment terms of only 2 to 4 years.

Check the price

Shady lenders run shady deals. One popular tactic is to drastically overinflate the value of the car, then charge interest of more than 20 percent on the loan. Car owners get a double whammy-they'll be overpaying interest on an overvalued car. To avoid the problem, do your price shopping ahead of time. You can expect to pay $200 to $500 more for the blue book value of a car, but anything more than that should raise red flags.

Keep it in perspective

If you must take out a bad credit auto loan, it's best to view it as a short-term expense-a means for rebuilding your credit. You can also use the loan to help start practicing smarter financial moves.

Before you close on a loan, do some online research to see if you can find a lower rate. Investigate car values to make sure that you don't overpay on a new auto. Most importantly, pay your bills on time once the loan is closed.

A bad credit auto loan is a kind of crossroads. If you begin to exercise sound financial judgment, the loan could be a steppingstone to better loans in the future. But if you make bad decisions simply to get a lower monthly payment, or buy something that stretches your budget, count on facing the consequences of bad credit once again.

Published on April 1, 2007