Case Study: How I helped a poor credit history car buyer get a 0% interest car loan
If you have a bad credit file the information contained below will help you get a cheap, if not free car loan.
A friend of mine was forced into a bankruptcy a few years back and he was finding it very difficult obtaining any kind of credit. It wasn’t until he had been discharged from bankruptcy for four years that he was able to obtain any type of car credit.
You may already know that even the best car finance for bad credit lender is expensive and APR interest rates range anywhere from 20% right up to 40%. Compare that to a good credit history of somewhere around 13% APR and we can see just how expensive it is to borrow from a poor credit lender.
The APR (annual percentage rate) is a broad measure to the costs of borrowing money for your new car. APR reflects more than just the interest rate; it includes additional fees incurred through borrowing, such as administration fees. Therefore, the APR is a more effective way of measuring the cost of borrowing as it includes any fees and other costs to lend the money.
Example: Good credit history lending
Lend amount: £7,500
Period: 48 months
Interest: 13.9% APR
Total cost of credit: £2,173.75
Monthly payment: £201.53
Example: Poor credit history lending
Lend amount: £7500
Period: 48 months
Total cost of credit: £5,578.80
Monthly payment: £272.47
In this example, borrowing £7,500 over 4 years will cost a poor credit car finance applicant £3,405.05 more than that of a good credit applicant.
Although poor credit car lending is expensive I’ve found a tangible way to pay zero interest on the loan amount. This is a genuine statement to which I will prove in the case study below.
Case Study Facts
With some support a friend (David), bought a VW Tiguan 2.0 TDI Sport with 52,000 miles for £9,489 from a dealer in Berkshire.
He was only able to borrow money from a poor credit lender and in this case he was accepted by Zuto Finance.
Here are the details of the agreement:
Car price: £9,489
Total amount of credit: £9,200
Period of loan: 48 months
Interest rate and APR: 36.4%!
Monthly repayments: £342.82
Total cost of credit over 48 months: £7,201.54
Important note: To reduce his monthly payments David has taken his loan over 48 months (4 years) but has decided it’s affordable to make 3 additional monthly payments each year. If he can sustain 15 monthly payments instead of 12 he’s actually going to borrow for 3 years. He wanted to take the 4-year option to help keep his monthly payments down. This is a safeguard in case he fell into financial difficulty in the future and was unable to pay the loan over 3 years. I love this kind of forward thinking flexibility when it comes to borrowing money.
We had already confirmed with Zuto that David was within the rights of his finance agreement to make 3 additional payments every 12 months. This is something you’ll need to confirm with your poor credit lending company before you sign into an agreement. Some may object and charge you for overpayment!)
On the basis that David does repay his car loan over 3 years and not 4, his new total cost of credit will be:
£5,401.55 = New total cost of credit over 36 months that immediately saves him £1,799.99 in interest charges
“But if he’s paying over 5k in interest how it is 0% and interest-free?”
Paying zero interest on a poor credit car loan can be done and if David maintains his agreement he will certainly pay no interest.
David needs to meet a little more criterion to get his 0% car loan:
1. He must not drive more than 12,000 miles per year (taking the car to a maximum of 88,000 miles once the loan is settled after 3 years.)
2. The car must be kept in reasonable condition throughout and be fit for resell at the end of the loan.
3. The car must be serviced in line with manufacturers guidelines (in this case every 10,000 miles or annually.)
Provided David meets the simple criteria I have laid out he will recoup all of the interest he has paid on the loan.
When accessing any type of car loan it’s incredibly important to buy the type of vehicle that holds its value very well. It’s vital with poor credit lending as the cars final value needs to be of equal value to the amount of interest paid on the poor credit loan.
The cars final valuation upon completion of the agreement will be used to theoretically pay off all of the interest on the car loan. Of course, there will be none as it’s all paid off, but the cars end of agreement valuation represents the amount of interest paid.
If David had bought a Vauxhall Astra at similar value to that of the VW Tiguan (around £9,000) we can see how much less the car would be worth when the loan was paid off:
Vauxhall Astra comparison car
Here is a comparative Vauxhall Astra (that is supposed to represent the same car as above but 3 years later) that I found on Autotrader. It is the same make, similar model, has completed around 40,000 miles more, is 3 years older and worth considerably less:
Example VW Tiguan similar car to David’s upon loan completion:
Notice, the Volkswagen Tiguan is worth so much more money at the point of loan completion. In fact, it’s worth more than double that of the Vauxhall Astra.
Because VW didn’t begin manufacturing the Tiguan until 2008 I was unable to find a similar car at an appropriate age. I would need to find one manufactured in 2005 but VW didn’t make the Tiguan until 2008. However, the image above shows just how much a 2008 VW Tiguan is worth that’s covered over 150,000 miles! It’s still being sold for over £6,300. In this example the high mileage supplements the cars age.
So, David’s VW Tiguan will easily be worth £5,500 in 3 years’ time provided he has not driven more than 36,000.
The total cost of the poor credit loan is £5,401.55 and the car will be worth around £5,500 once the loan is paid off. If David wants to sell his car in 3 years’ time the sale money would reclaim all of the interest he’d paid on his high interest, poor credit loan! That equals an interest-free loan and a good credit rating now that David has maintained all of his car finance payments.
There are a number of important features on David’s VW Tiguan thatsupport its valuation. Here’s the cars full description:
Volkswagen Tiguan 2.0 TDI Sport
52,000 Miles with a Full Service History & recent cam belt change
17″ VW Sports Alloy wheels
2 Previous owners from new
This car holds its value because it’s a VW Tiguan Diesel in a good selling colour. But, it also has some added extras that you don’t always get on this car type at its point of manufacture. The car has a Sports Pack that includes enhanced VW alloy wheels, Sports Seats, Satellite Navigation, Cruise Control and Bluetooth. When it comes to valuation and resell this car is extremely desirable. There will only be a handful of this car type for sale across the UK at any one time. In contrast, there will be plenty of VW Tiguan’s for sale but they will be more standard and lack the desirability factor I am talking about with David’s car.
I used all of my experience to find this car for David and it demonstrates just how important it is to buy a vehicle that holds its value. Here are just a few car types that hold their value wonderfully and will save you thousands of pounds on a poor credit loan.
Mercedes M Class
Mercedes M Class
Volkswagen Passat Diesel Estates
If you can buy one of these vehicles with added extras you stand the best chance of paying off all of your loan interest and could even have some cash left over.
If you are planning to move forward with a car loan but are suffering from a bad credit history read my poor credit car financing article for some important information.
The Used Car Guy