Bad Credit – Business Vehicle Finance
Written by: Phillip Gruppelaar
You have blotted your credit file with a default or defaults and things seem really tough to get a business vehicle loan approved.
One thing you and I both know, no bank or major finance company is going to lend you the money you want. The good news is there are a number of organisations who will.
Firstly, you need to understand that once you have a default or judgement on your credit file. The likelihood of it happening again is approximately eight times higher than an organisation with a clean credit file. As the financier has a proven higher risk, you are going to have to pay more. (i.e. interest and/or fees)
So why is this? Financiers who lend to these businesses (owners have defaulted previously) know that they will have more defaults than a financier that only lend to organisation’s with clean credit files. To offset these loses, bad credit lenders have set aside the extra interest and fees to ensure they remain profitable.
If you have bad credit and you want a business vehicle, it’s advisable that you use a “stepping stone method” This means you are going to be charged more for the entire period of the loan. The more you borrow the more you will pay.
Buy a less expensive vehicle that will serve your purpose until your credit rating is repaired (if you get a good rating on this loan your next loan should be cheaper. Financiers range from 12 months to 18 months good conduct)
Enter into a rent to buy agreement, these are normally 12 months, you will pay a high payment, but you will gain equity, a good credit rating and an option to give the vehicle back after the 12 months if you don’t want.
Pay a large deposit to take away the financiers risk. You still won’t get approved by a bank, but you will in most cases pay a lower interest rate.
Buy whatever you want and cop the higher interest rate and fees “on the chin”
In many cases “Rent to Buy” is actually your best option.
Payments on rent to buy are higher than conventional finance. If a conventional bad credit loan over 5 years payment was $125 per week, rent to buy would be $240 per week. However after 1 year you would owe approximately $18,000 on the loan, but only $12,000 on the “Rent to Buy”
On the bad credit loan you need to keep paying the loan at the high interest rate until you pay it off.
With the “Rent to Buy” you are now in many cases free to enter the good credit world.
1. Provided you have made your payments on time you now have a good credit rating at a high payment
2. You only owe 60% on the vehicle and the contract has finished, you can refinance the vehicle at a better interest rate (note, as a general rule financiers will not refinance a loan mid-term (i.e. financier aren’t going to refinance your bad credit loan, with “Rent to Buy” they will as it’s a new purchase”
3. The vehicle can be handed back and you can pick a new vehicle to finance
4. If no-one else will finance you the “Rent to Buy” funder will give you a loan option at a lower rate.
Don’t be put off by the high payment initially from “Rent to Buy” look at the full picture before you make your decision. If you have to operate in the bad credit car finance arena it’s a far better option than at first glance.
What if you can’t afford the “Rent to Buy” option. You need to seriously look at your business, is it really a sustainable and profitable business option?