One of the first questions that we are asked by applicants and potential applicants is what interest rate they can expect on a subprime auto loan. Unfortunately, you generally won't be able to find out this crucial bit of information until after you get approved for the car loan. Allow us to explain.
The More Nuanced Subprime Auto Loan Process
The majority of traditional lenders, like banks and credit unions, assign interest rates based on credit scores. This speeds up and simplifies their approval process. However, the computer systems used by traditional lenders will usually auto-decline applications from people with subprime credit scores (think below 620).
Luckily, there are subprime lenders out there who are willing to approve people with less than perfect credit. How? Because instead of solely focusing on an applicant's credit score, subprime lenders consider other pertinent factors and use unique procedures.
Through their more nuanced and thorough process, subprime lenders are able to determine which applicants qualify for approval.
The Factors Considered
With a subprime car loan, each individual is evaluated on a case-by-case basis. Subprime lenders do take credit scores into account, but they will look past them to weigh many additional factors. These variables revolve around three areas:
Your ability to afford a car payment and handle the loan will be evaluated closely. Lenders will consider your income, monthly bills, debt-to-income ratio, payment-to-income ratio, down payment amount, and the potential vehicle loan to value.
Stability covers how long you've been employed at the same job or in the same field, as well as how long you've lived at your current address or in the same geographical area. Generally, lenders look for one year with your current employer. With a shorter job time, you will be viewed more favorably if you've remained in the same industry or switched employers for higher pay or a better job. As for residence stability, people who move around are considered riskier applicants. The longer you've been at your current residence or same geographical area, the better.
- Willingness to Pay
Subprime lenders will also analyze your credit reports and examine your payment history, especially on past auto loans. They will be concerned about any "slow pays," but they will also check to see if it's situational or habitual. Situational bad credit refers to poor credit practices that came as a result of one unexpected event, such as a sudden job loss or medical emergency. Habitual bad credit is when instances of paying late are regular. Those whose circumstances can be seen as situational will be viewed more favorably than those with habitual bad credit tendencies.
Subprime lenders carefully analyze all of these factors when evaluating an applicant, and they do so to measure the risk of every potential loan. This way, they are able to approve applicants even if they have subprime credit scores.
Back to Your Interest Rate
Speaking of risk, subprime lenders typically charge higher than normal interest rates because subprime auto loans are considered riskier. However, it will be impossible to quantify exactly what your individual interest rate will be.
As you now know, there are many, many variables that are being taken into consideration and each lender will weigh these factors differently. Because of all of the moving parts in play, it would be foolish for us to speculate what your specific APR might be.
There's only one way to find out what your interest rate will be, and that's getting approved. At Auto Credit Express, we match credit-challenged consumers with the car dealer in their area that stands to give them their best chance at an auto loan approval.
If you need a car but have poor credit, we can help. Just fill out our secure and obligation-free online application and we'll get to work for you.