Is There Such A Thing As Subprime Auto Loans?

Do you need a car but can’t get an auto loan due to bad credit? Discover subprime auto loans: what they are, how they work, and how to get one. For many people, an automobile is a basic necessity of life. Public transit is not available in smaller communities, but yet people still have to get to work. Commuters find themselves having to live and work in different places, making the need for an automobile even greater. To accommodate all the people that identify a vehicle as a “need” rather than a “want,” there is a segment of the lending industry that caters to people with less-than-perfect credit. These “subprime auto loans” are very common and readily available for many people with questionable or no credit history. It’s true that these are very helpful to many consumers, but there is certainly some information you’ll want to have before you travel down that funding path. 

What Are Subprime Auto Loans?

John Egan writes for Credit Karma that “subprime” loans are typically made for people with a credit score between 501 and 600. Egan goes on to identify the following categories of credit including: 

  • Super Prime – 720 or higher
  • Prime – 660 to 719
  • Near Prime – 620 – 659
  • Subprime – 580 – 619
  • Deep Subprime – Below 580

The subprime auto loan industry offers loans to people with very bad credit as well as no credit at all. Some people simply don’t have any credit history built-up. The subprime auto loan can give them an opportunity to build a solid credit history and secure a higher credit score. 

What’s Good About Subprime Auto Loans ? 

As mentioned above, subprime auto loans can provide financing for a vehicle to people in need, but without a solid credit history. Bad things happen to good people every day. There is a story behind every bad credit score and very often, these people are capable of paying their bills and paying them on time. These loans give people the opportunity to not only secure financing but to rebuild their poor credit. In many cases, these loans are crucial for allowing people to build their credit score for the first time. These loans are not hard to obtain, and car dealerships are more than happy to help you with the financing. 

Higher Interest Rates 

Subprime auto loans are helpful in many ways, but they definitely come with a downside. The interest rate on these subprime loans is considerably higher than the prime rate. Will Kenton writes for Investopedia that the difference between the prime rate and subprime rates is very wide. Those falling into the deep subprime category should expect to pay an average of 15.24% in interest. There are a lot of different lenders out there and a lot of different lending practices. Some lenders will charge even higher interest rates, soaring well beyond 20%, so make sure you know exactly what the interest rate is and do some research with different lenders. Fortunately, with more competition in the subprime auto loan market, there are options that don’t take advantage of customers that are more readily available. 

Fees and Fine Print

Those financing subprime auto loans are well aware that you have limited funding options. Not all lenders treat their customers with the dignity and respect that they deserve. Do some research and shop around for financing, even at the subprime rate. Knowing what the payment terms are and how payments are made is important. Make sure you know all the fees you are paying and financing with the vehicle. Processing fees, required service contracts and even prepayment penalties if you pay off the loan before its scheduled end date are just some of the fees that are often assessed. Because subprime lenders are leery of default, they are very quick to repossess vehicles. If you are looking into a subprime auto loan, make sure you are comfortable with the payment terms and schedule so you don’t default. 

Best Practices

If you are in need of automobile financing and can’t qualify for a prime rate or better, subprime auto loans can be a useful alternative. If this is the direction you need to go, make sure you are first determining the type of monthly payment that you can afford to make and determine how much you can finance. Try to get the car on a shorter loan period to avoid paying more interest than necessary. Ask about all the fees that are included in the financing of the vehicle and be very clear on all terms and conditions. Researching different auto loan options before you go shopping puts you in a better position to find the best interest rate and terms possible. Make sure you also check your credit first before you begin your research. Credit scores can move in one direction or another quickly, and often it is not as bad as you imagine. Checking your credit yourself gives you an accurate image of your credit profile before anyone else takes a look. 

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All data provided by the Home Mortgage Disclosure Act, at updated Dec, 19
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