There’s always a risk in taking on new credit – including auto loans. Whether you take on a traditional car loan or work with a subprime lender, there are risks to consider before signing that dotted line.
What Is a Subprime Car Loan?
First, let’s define subprime vehicle financing.
Subprime is a term used to describe bad credit borrowers, generally defined as a borrower with a credit score below 670. It's more of an umbrella term, encompassing loans for borrowers with tarnished credit, and the lenders that provide them. Typically, subprime lenders are third-party lenders signed up with special finance dealerships.
These lenders often assist credit-challenged borrowers who struggle to meet traditional auto loan requirements. This can include borrowers with no credit, poor credit history, bankruptcy, divorce, and other bad credit situations.
Risks Associated With Secured Car Loans
Whenever you take on new credit – whether that be a credit card or an auto loan – you’re taking on some risk.
If you agree to repay a car loan over the course of a few years, then you’re obligated to make those payments or risk default and a possible repossession. Default and repos can drastically lower your credit score, and make it harder for you to take on new credit for at least one year, in most cases.
Car loans are typically secured, meaning that the vehicle is collateral for the loan. If you break the contract, the lender typically moves forward with repossession – leaving you to pay a leftover loan balance and you’re left without a vehicle.
Auto loans can last anywhere from four to eight years, sometimes longer. It’s a big commitment. If you were to lose your income during that time, or have other financial difficulties, it could lead to struggles with the car loan. And, possibly losing the vehicle and damaging your credit reports in the process.
Another big part of auto financing is interest charges. Interest is the cost of borrowing money, and if your credit score is in the subprime scoring range, then you may pay more in interest. For some borrowers, this could mean paying more than the car is worth. While it’s common to pay a little more than the vehicle’s value when you finance, a high interest rate could mean thousands more.
Taking on a car loan is a balancing act between affordability, vehicle value, and stability. If you believe you’re financially able to repay a car loan, and you can wrangle a good interest rate on a decently-priced vehicle, then auto financing may not be that risky for you.
Subprime Vehicle Financing Considerations
If your credit score needs some work and you’re thinking about looking into subprime financing, there are some things to know:
- Interest rates on subprime auto loans are typically higher than traditional car loans
- Most subprime lenders require a down payment, typically at least $1,000 or 10% of the vehicle’s selling price
- Subprime lenders have vehicle requirements, generally requiring borrowers to choose a vehicle with under 100,000 miles and less than 10 years old
- Subprime lenders typically can’t assist borrowers with a repossession that happened less than 12 months ago
- Borrowers with multiple, recent delinquencies on their credit reports may not be eligible (such as a recently dismissed bankruptcy)
While a subprime car loan may require a down payment and the interest charges can be higher than traditional financing, this is typically because borrowers with poor credit seek out subprime car loans. A lower credit score is usually the culprit for a high interest rate, since auto lenders largely base your loan terms on your credit rating and individual situation.
Down payments are required with subprime car loans because cash down lowers the chance of loan default, and shows the lender you’re willing to invest in the vehicle. Down payments are beneficial to bad credit borrowers as well, since they lower the amount you need to finance, lowering your monthly car payment.
While subprime lenders require more from their borrowers, the loan is reported, and your credit score can benefit if you stay current on the payments. Once you’ve repaired your credit score over time, you may not need to seek out special financing for your next vehicle.
Always Read the Fine Print
No matter what loan agreement you’re looking to accept, you should always read the fine print. There are a few things to look for before signing a subprime car loan agreement:
- Prepayment penalties – Prepayment penalties are uncommon now, but in some cases, lenders charge borrowers extra if they pay off their auto loan before the predetermined end date. Ask the lender or special finance manager if there are any prepayment penalties in the loan agreement.
- Total interest charges – Lenders must disclose your interest rate and total interest charges anticipated throughout the life of the loan. Make sure the verbally agreed-upon interest rate and the rate listed in your loan documents match. If you sign it, and find out later that it’s not what was verbally agreed to, it’s too late to change it (unless you refinance the car later on).
- Cross-reference documents – There are many documents that are involved in the car buying process, including the loan agreement and the buyer’s order. A buyer’s order is done by the dealership, so make sure the vehicle’s information, down payment amount, and everything else is consistent between the two documents. Both items are legally binding once signed by both parties.
- Ask about deferment options – It’s not uncommon for a borrower to lose income over the course of a car loan, and it could make it difficult to stay current on payments. However, some lenders allow deferment programs that pause payments for a month or two to allow the borrower to reorient themselves to resume payments. Not all lenders offer these programs, so ask what requirements there are to qualify for them and if they’re offered by the lender at all. You never know – you may end up needing it if you run into financial difficulties in the future and it could help you avoid default and repo.
Lenders vary, and they all tend to have different terms and conditions for their auto loans. It’s always important to know what you’re signing up for when taking on a car loan, so don’t be afraid to ask questions or ask for clarification.
Ready to Find a Special Finance Dealership?
It can be tough to nail down special financing for a vehicle. Not all dealerships are signed up with subprime lenders, and not all dealers advertise what lenders they’re signed up with.
Instead of trying to locate a special finance dealership that’s signed subprime lenders all on your own, let us at Auto Credit Express find one for you. Using our nationwide network of special finance dealers, we’ll look for one in your local area at cost and with no obligation. Complete our auto loan request form to get started.