If you have a bad credit rating for, whatever reason, it is very tempting to give up on credit all together and decide it is not for you.
Or … you may be looking for a way to take on low risk credit to help you re-establish a healthy credit profile for the future.
Either way, the possibility of buying a luxury or prestige car may seem entirely out of reach. Well … It need not be!
This article is about a surprisingly well kept secret that allows some lenders to offer reasonably priced loans to people with a bad credit history – specifically to buy high quality prestige cars. The best thing about this is, not only are the lenders willing to take on the risk, they are out there actively looking for customers.
So how does it work?
Broadly speaking loan money comes in 3 packages:
- Unsecured – the risk is all with lender, but you pay a high price
- Secured (usually on your home / property) – the risk is all with you, but you pay a low price
- Hybrid (fully or part secured on something)- moderate risk to both you and the lender
The prestige car loan market falls into category 3 very neatly. This is how it works.
Let’s start by explaining the issues relating to a loan for a low value (non prestige) car.
When loans are given out for this type of car, the risk assessment on behalf of the lender has to take into consideration the depreciation of the car. That is, the low prestige car will have a steep depreciation decline and will have a value that will drop to zero within only a few years of leaving the show room.
Therefore, the challenge to the lender is to ensure that the total value of the loan is repaid at a faster rate than the value of the car declines so that, at the point at which the loan is paid off, the car still has a market value – or at least hits zero at the same time. It is true that if you cannot keep up payments you will loose the car, but it is difficult for the lender to come out on top of the situation – most times they will be minimising their losses.
What this means is (to minimise the risk to the lender) the chances are you will be paying more interest and have a relatively short repayment period – or at least have your options reduced. So to the prestige car loan market.
The prestige car will have a higher start value, but the depreciation decline will be relatively moderate. In fact, often so moderate that the reduction in value on a month by month basis will often be less than the amount you are paying back on the loan.
In this scenario the risk assessment on behalf of the lender is easy. The loan can, in effect, be easily secured on the value of the car. If the borrower cannot pay, the car can be repossessed and the lender is no worse off. Although it does not happen in real life exactly like this, figure 1 below gives some indication of comparative rates of depreciation.
The Blue line shows the depreciation rate of a high value car, the red line that of a low value car. You can see that it takes substantially longer for the higher value car to reach a zero value than the lower value car.
Even if the car is damaged or written off, the lost value can be recouped from insurance cover, so in general the risk looks good – even if the borrower has a poor credit record.
However, the good stuff does not end at the lender’s door: because the whole package is related to the risk of loss on the lenders side, if the risk is reduced, then the borrower can also usually gain from this.
As long as you accept the risk of losing the car if you cannot make the repayments, the interest rate will be relatively moderate and you will still retain a valuable vehicle which can be resold on even after it has been repaid.
If you would like more about prestige car loans for people with a bad credit history then get in touch.