Pennsylvania does not have a set of usury laws like many other states. That may lead you to think that lenders are charging outlandish rates as if it were the Wild West, but the state has legislation that sets the maximum rate for cars of two years and newer at 18%. For cars older than two years, the maximum rate is 21% for consumer vehicle financing contracts (source link). Let’s have a quick look at who may face the maximum rate, how it will affect your loan and payment, then wrap it up with a few options that you have if you are required to pay the top interest rate for an auto loan in Pennsylvania.
Who Faces the Highest Rates?
In most cases, the only borrowers who face the maximum interest rate in any state are those with bad credit. With an auto loan, general bad credit does not necessarily mean you will have to pay the maximum interest rate. Auto lenders will look specifically at your past use of car loans before assessing your exact interest rate. If you have a history of late payments on car loans or a repossession, you have a very good chance of paying the maximum interest rate possible; if your loan is approved at all. On the other hand, if you have made mistakes in every aspect of your credit except your past auto loans, you may qualify for a slightly lower-than-maximum interest rate.
Total Interest Paid and Monthly Payments
You are going to take two hits to your wallet when paying the maximum interest rate on an auto loan in Pennsylvania: total interest paid and a higher monthly payment. Let’s model a loan to show you what we mean. The loan is for $25,000 at six percent with a term of 60 months. Over the life of that loan, you will pay $3,999.20 in interest and have a monthly payment of $483.32. Looking at that same loan: if the interest rate were today’s prime rate of just 1.99 percent, you would only pay $1,285.08 in interest and the payment drops about $50 a month. Now imagine if you have to pay 21% or 18%!
With bad credit time is on your side. Well, it is if you have stopped making credit mistakes. Late payments and repossessions fade over time. Late payments will begin to fade six months after you start making all of your payments on time. If you have stopped making late payments because you have no open credit accounts, then you are going to want to obtain a credit card to start building a positive payment history. With bad credit, you may have to find a secured card with a small limit. That will help, just be sure to avoid a pre-paid card. Pre-paid cards are not reported to the major credit agencies, so will not improve your credit. Once you have obtained your card, make your payments on time and never let the balance get higher than thirty percent of the credit limit.
Your second option is to shop your loan. Many people who have bad credit think that they have to use traditional brick-and-mortar banks. That is not true. There are many reputable auto lenders online who specialize in approving bad credit auto loans. These specialty lenders chose to operate online to keep costs down so they can offer loans to lower credit scores in the most cost effective way possible. Good luck with your search for a car loan!