Today there are plenty of lenders who are willing to offer car loans to people who have accounts in collection. Even though they are willing to offer loans, the terms may not be the most favorable. Since such consumers already have debts that aren’t being paid, lenders will need to protect themselves through elevated interest rates and down payment requirements. Plus, they have to take into account that the applicant’s current income may not be an accurate indicator of their future income.
The Risk of Wage Garnishments
Lenders are going to look at the potential that these collections could turn into wage garnishments, compromising your ability to repay a loan. That means that they will look at your income, then subtract a potential garnishment. That will be your disposable income. If your new loan plus other debt payments exceeds their guidelines, your application will most likely be denied. Most require a minimum monthly income of $1500.
Down Payments Mitigate Risk for Lenders
If you pass the repayment criteria, you will need to offer a significant down payment. The down payment signifies your commitment to the loan. If you already have debts in collection, lenders will think that you are not very committed to making on-time payments. Accordingly, they will want you to offer a larger down payment. You may be forced to put as much as 50 percent down before your loan will be approved. Additionally, you will most likely face a high interest rate and get a short term loan only.
You may be better of paying the collection accounts before you apply for a new car loan. This will result in lower interest rates, less stringent terms, and a less significant down payment amount.