Consumer Car Buying Advice Blog

A recent blog article listed three dangers of subprime auto loans. Here we explain how to avoid all three.

In our experience

At Auto Credit Express we’ve spent close to 20 years working with consumers who have bad credit and helping many of these same individuals raise their FICO scores and reestablish their car credit by financing a vehicle with a bad credit auto loan. At the same time, we try to educate our applicants on the loan process, since a bad decision at the outset can lead to potential problems during the credit rebuilding process.

As with anything else, the key to a successful bad credit car loan is focusing on the basics and in this article we’re going to focus on another article that we recently came across that discussed 3 dangers of subprime auto loans.

Article statements and our responses

Article: introduction

“Many people are forced to use subprime auto loans as a means to buy a car because of their poor credit history. The subprime lending market is there for those that have made some financial mistakes and have blemishes on their credit report. While it can be beneficial to some, it is also known for causing its fair share of problems. Getting involved with a subprime auto lender could compound your financial problems if you are not careful.”

Response

We have to agree with pretty much everything that was said in this opening statement. But at the same time, it should also be noted that getting involved with any kind of lender could compound your financial problems if you don’t pay back the loan as agreed.

Article: 1. Financial distress

“One of the worst things about subprime auto loans is that they are always going to have a higher interest rate than other types of loans. When you are paying a substantially higher rate of interest than everyone else, this means that your payment is going to be higher in most cases. When you are having financial trouble, you do not need another payment weighing you down. This can be especially troubling if the payment is a large one. When you agree to a subprime auto loan, you could be tying your hands financially for the future. A huge car payment can be the source of significant financial distress.”

Response

It is absolutely true that bad credit auto loans carry higher interest rates than traditional auto loans. The lender is taking on more risk if you have bad credit and, therefore, you should expect to pay higher rates. But there are at least three ways to mitigate these higher rates:

1. Plan on coming into the loan with at least 10 percent down in cash or trade equity.
2. Buy an affordable compact or midsize vehicle and put off looking at your dream car until after you’ve reestablished your credit
3. Keep the loan term as short as possible to keep negative equity in the vehicle at a minimum. This will allow you to trade out of the vehicle sooner and, assuming all your payments have been made in a timely manner, qualify you for a new loan at a lower interest rate.

Article: 2. Risk Losing Your Car

“When you deal with subprime auto loans, there is a good chance that you will have your car repossessed at some point. Since the payments are often higher than you can afford over the long term, many borrowers get in the habit of missing payments as a result. When you miss enough payments on your auto loan, they are going to come and repossess the car. You will lose your primary means of transportation, which can lead to even bigger problems. When you don’t have a car to get to work, your job is on the line as well.”

Response

With any car loan you will run the risk of repossession if you miss enough payments. In fact, most regular loan contracts have a clause that states that the lender has the right to repossess the vehicle if you are one day late with your loan payment.

To prevent this from happening with a bad credit auto loan, refer to the three suggestions we offered above.

Article: 3. Damage Credit Further

“Since there is a higher risk of repossession with subprime auto loans, there is also a higher risk of damaging your credit even worse than it already is. When you have a car repossession on your credit history, it will drastically affect your credit in every way. You will not be able to get a loan for another car or most likely anything else. A repossession will stay on your credit file for as long as seven years in most cases. Therefore, you will be living on a cash basis for the next seven years if this happens to you. Your credit is one of the most important things that you have. When you sign up for a subprime auto loan, you do not plan on being in the “bad credit” category for your entire life. However, with the way they have it set up, it often leads you to stay there for a lot longer than you would like.”

Response

Repossession is a big black mark on your credit history – there’s no doubt about that. Repossession is especially bad if it happens to be with a bad credit auto loan lender. Once it happens, however, you won’t necessarily be living on a “cash basis” for the next seven years, but it probably will be at least two years before you can apply for another bad credit auto loan (with higher down payment requirements).

But at the same time, if you approach a bad credit car loan in a responsible manner and basically follow the three steps that were outlined above, you should have a really good opportunity to reestablish your car credit and improve your credit score at the same time.

The Bottom Line

There is the smart way and there are other ways of approaching a bad credit car loan. By choosing an affordable car, putting down a large down payment, and keeping the loan term as short as possible, you will give yourself a better chance of coming through the auto credit reestablishment process successfully.

For nearly 20 years, Auto Credit Express has been helping people with credit problems get approved for new and used car loans. Our dealer affiliates work with a broad spectrum of bad credit auto loan lenders to get you approved. Since our inception, we have processed over 2,000,000 online bad credit auto loans and our dealers have closed over 1 billion dollars in auto loans.

For more information, please visit www.autocreditexpress.com to see what we can do for you.

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