Subprime Auto Loans: Everything to Know About
Auto loans are often seen as a way to get the best possible rates and terms on a vehicle purchase, but what about individuals with bad or limited credit? In this article, we will discuss what subprime auto loans are and how they work – including the benefits and risks of getting one.
When you’re ready to purchase a car, you may have a few options available to you. And while each option carries its own set of benefits and risks, there’s one type of vehicle purchase that stands out for having particularly high rates of delinquency and default: auto loans subprime.
Subprime auto loans are a type of financing that is given to people with bad credit. They may be a good option for those who can’t get approval elsewhere and need a vehicle, but they also come with many risks.
What Is a Subprime Auto Loan?
This is a type of car loan for people with bad credit scores or histories. This includes anyone who has had a bankruptcy or foreclosure in the past, as well as those with low scores. These loans are typically used by borrowers who have been turned down for other types of financing because they have bad credit histories which makes it particularly difficult to get approved for traditional loans. Because these loans are offered to such a wide range of borrowers, the risks associated with them can vary quite a bit. All these factors we mentioned make them a more expensive option as opposed to a traditional auto loan.
How Do Subprime Auto Loans Work?
Subprime auto loans are loans made for consumers who do not meet the traditional lending criteria, such as having a clean credit history.
Your credit score determines whether you’re considered subprime or prime for an auto loan. If you have poor credit or don’t have a lot of experience managing credit responsibly such as paying bills on time, then you’re probably considered subprime by lenders—and therefore likely won’t qualify for a conventional car loan through traditional channels like banks and credit unions. However, some subprime lenders offer financing options specifically designed for borrowers who don’t meet traditional standards but still need financing options that help them buy new or used vehicles quickly and easily. A credit score between 580 and 619 is considered subprime.
While many people think about applying for an auto loan when they want to purchase new cars at dealerships, there are many other ways that you can use these types of loans such as buying used cars from private sellers or even fixing up old cars yourself before reselling them later on down the line.
How to Get Subprime Auto Loans
To get this type of vehicle financing, you’ll need to first meet with a lender. There are a few steps you can take on your own before your appointment:
- Review your credit report and score
- Check the status of your debt-to-income ratio
- Get copies of recent bank statements
Once you’ve gathered all these documents, compare rates and terms so that when it comes time to talk with lenders during the application process, they can help guide you. This will help direct you toward what would be best for you as an individual consumer as opposed to just offering recommendations based on generic profiles of customers. Subprime auto loans can also be obtained online if that is something you prefer.
Subprime Auto Loans: Benefits and Risks
As we already mentioned, these auto loans are typically more expensive and riskier than traditional auto loans, but there are also some benefits to consider before giving up on this option.
Benefits
- There is often no credit check required. This just means that you could qualify for a loan even if you have a poor credit history.
- Flexible terms. Some subprime lenders offer flexible terms, which means that you can adjust your borrowing limits or repayments depending on your financial situation.
- These loans have better interest rates than deep subprime auto loans, so this is another benefit for borrowers who find themselves qualifying for a subprime lending option.
- There is a fast approval process.
Risks
Let’s now take a look at some risks of taking out this loan:
- Higher interest rates, monthly payments, and depreciation. Due to their lower credit scores and less-than-perfect past credit history, subprime borrowers are likely to pay higher monthly payments because lenders are hesitant to give them good terms.
- Increased risk of defaulting on your auto loan. Since these borrowers are considered a higher credit risk, they may find it difficult to make all of their monthly car payments on time or even keep up with them at all if they go into default. This can result in repossession or foreclosure of the car.
- Risk of not being able to afford the car in the future. Subprime auto loan interest rates offered by lenders will make your monthly payment quite high, so if you have some other expenses this may become a problem.
Overall, it’s important to weigh the pros and cons of taking a subprime auto loan before deciding whether or not it’s the right option for you.
How to Determine If a Car Loan Is a Subprime?
When you’re considering an auto loan, it is essential to know the difference between a subprime and a non-subprime auto loan. A subprime car loan is typically defined as one that has a FICO score of 619 or less. When determining your credit score, lenders will look at several factors including:
- Length of time the borrower has lived at their current address
- Amount of debt vs. income ratio
- How long it has been since you’ve filed bankruptcy (if any)
Another sign that a car loan may be a subprime loan is if there are high fees associated with it, such as origination or closing costs. These fees can really add up and make the overall cost of the car loan too high for some people. Keep in mind that the average subprime auto loan interest rate is about 9.75% for a new car and about 16% for a used one, so calculate your payments carefully. Prime vs subprime auto loans will offer you much better rates if you can qualify.
How to Get Out of Subprime Auto Loans?
If you are in a position where you have been taken advantage of by a subprime auto loan, there are a few things that you can do to get out of the loan. The first step is to contact the lender and ask for a modification. If the lender refuses to modify the loan, then you still have some other options. You can try to refinance the car loan with a better interest rate. You can also look into getting a credit card with 0% APR for purchases on balance transfers so you can pay it off this way.
Final Thoughts
Subprime auto loans can be a good option if you have bad credit and need to get back on the road. They can help you build your credit score, which can lead to better rates and terms when it comes time for you to buy a house or refinance an existing mortgage. While there are many benefits of these auto loans, it’s important to keep in mind that they also carry significant risks. Be sure to first search reputable subprime auto loan companies to find which one offers the best subprime auto loans. With all this being said, they still can be a great way to buy a car if you have bad credit or no credit history at all.
