Key Takeaways
People with low credit ratings or no credit history may qualify for subprime auto loans, a form of loan used to fund the purchase of an automobile. Subprime loans typically include higher interest rates and prepayment penalties than prime loans if the borrower decides to pay off the loan early. However, subprime borrowers may be ready to pay these extra costs if they cannot afford a car.
Having an abundance of funds, banks started charging exorbitant interest rates to subprime borrowers in search of even more profit.
The media eventually popularized the word "subprime" during the subprime mortgage crisis/credit crunch of 2007-2008. While the number of subprime lenders was reduced in the wake of the Great Recession, recently, there has been a rebound.
If you have to get approved for a subprime loan, it's always smart to compare interest rates from several lenders. Lenders have varying requirements for approval, and some have higher rates than others. If the borrower defaults on the subprime loan, the lender will want to ensure they get their money back. Thus the interest rates can be much higher than a traditional auto loan.
Borrowers who wish to avoid being denied auto loan applications may consider working to increase their credit ratings beforehand. As a result, they'd be able to get a loan with considerably more favorable terms.
| Lenders | Minimum credit score | Starting APR | Loan term | Type of loan |
|---|---|---|---|---|
| Auto Credit Express | 300 | 4.49% | 36 to 72 months | Used car loan |
| carloans.com | 580 | 3.7% | Up to 84 months | General loan |
| myAutoloan.com | 575 | 3.44% | 24 to 84 months | Used car loan |
| Carvana | 300 | 4.4% | 12 to 72 months | Used car loan |
| open road Lending | 500 | 2.99% | 12 to 72 months | Refinance loan |
The average subprime auto loan rates are different for new and used cars. Rates will be higher for used cars when compared to those for new cars.
The table below shows the credit scores and the corresponding loan rates for new and used cars.
| Credit Score | Credit Tier | New Cars | Used Cars |
|---|---|---|---|
| 781-850 | Excellent | 2.90% | 4.21% |
| 661-780 | Good | 4.06% | 6.08% |
| 601-660 | Nonprime | 7.20% | 10.98% |
| 501-600 | Subprime | 11.37% | 17.79% |
| 300-500 | Deep Subprime | 15.26% | 21.49% |
The table above makes it clear that for subprime borrowers, the interest rate for used car loans is 17.79% which is higher than that for a new car loan which is 11.37%.
Subprime borrowers can acquire auto loans, but they will have to pay higher interest rates than those with better credit. Before applying for a loan, it is advisable to work on raising your credit score.
Before you plan to take a subprime auto loan, you should know in advance about its hidden risks.
The APR of subprime auto loans is usually far higher than that of conventional auto loans. A person with a credit score of 781-850 will get a used car loan at 4.21%, while a subprime borrower's APR will be 17.79%, much higher.
People in unstable work situations, especially those whose jobs require them to have a car, are more at risk since they may have less power when negotiating the conditions and interest rate of their auto loan.
In addition to high APR, subprime borrowers will have to pay higher fees. These fees include processing fees, prepayment penalties, and service contracts for maintenance or repairs.
A borrower who obtains a subprime auto loan with an unfavorable repayment schedule is more likely to default on the loan, which could result in the seizure of your vehicle. Defaulting on a car loan and having it repossessed might cause more problems than just the loss of the vehicle. A study indicated that persons who have had their cars repossessed are more likely to file for bankruptcy and have a harder time getting approved for credit than people who fell behind on their car payments but didn't have their vehicles repossessed.
While there are dangers involved with subprime vehicle loans, you can save yourself from any related risks through your keen understanding of the loan rates and other repayment options. See what kind of car you can afford. Before applying for a loan, you should figure out what your monthly payment would be. Examine your credit reports and ratings. Knowing where you generally stand in terms of these scores will give you an idea of what possibilities might be available to you when it comes to borrowing money.
You can still receive an auto loan, but the interest rate will be much more than it would be for someone with a good credit score. If your credit score is low, you should work to raise it before applying for a loan.
Some subprime auto lenders are Auto Credit Express, carloans.com, myAutoloan.com, Carvana, and open road Lending.
You may qualify for a subprime vehicle loan if you have a low credit score or a poor credit history. Those with credit ratings under 600 should look into these loans. Due to the increased probability of default among borrowers needing subprime loans, these loans have a significantly higher interest rate.