There is always a risk when taking out new loans, including car loans. Whether you’re taking on a traditional auto loan or working 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.
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Subprime is a term used to describe: bad credit borrowers, generally defined as a borrower with a credit score of less than 670. It is more of an umbrella term, encompassing loans for borrowers with compromised credit, and the lenders who provide them. Typically, subprime lenders are third-party lenders signed up with special financial dealers.
These lenders often help lenders who are struggling to meet traditional auto loan requirements. These can be borrowers with no credit, a bad credit history, bankruptcy, divorce and other bad credit situations.
Risks associated with secured car loans
Whenever you take out a new credit – be it a credit card or a car loan – you are taking some risk.
If you agree to repay a car loan over the course of a few years, you are either obligated to make those payments or risk defaulting and a possible repossession. Default and repos can drastically lower your credit score and in most cases make it harder for you to take out new credit for at least a year.
Car loans are usually secured, which means that the vehicle is collateral for the loan. If you break the contract, the lender usually proceeds with repossession – leaving you with a leftover loan balance and you are without a vehicle.
Another big part of car financing is interest expense. Interest is the cost of borrowing money, and if your credit score is in the subprime score range, you may be paying more interest. For some borrowers, this may mean paying more than the car is worth. While it is common to pay a little more than the value of the vehicle when you finance, a high interest rate can mean thousands more.
Taking out a car loan is a balancing act between affordability, vehicle value and stability. If you think you are financially able to repay a car loan and can get a good interest rate on a reasonably priced vehicle, then car financing may not be that risky for you.
Subprime Vehicle Financing Considerations
If your credit score needs some work and you’re considering subprime financing, here are some things to know:
- Interest rates on subprime car loans tend to be higher than traditional car loans
- Most subprime lenders require a deposit, typically at least $1,000 or 10% of the vehicle’s retail price
- Subprime lenders have vehicle requirements, generally requiring borrowers to choose a vehicle with less than 100,000 miles and less than 10 years old
- Subprime lenders typically cannot help borrowers with a repossession that occurred less than 12 months ago
- Borrowers with multiple, recent past due claims on their credit reports may not qualify (such as a recent declared bankrupt)
While a subprime car loan may require a down payment and interest costs may be higher than traditional financing, it is usually because borrowers with poor credit are seeking subprime car loans. A lower credit score is usually the culprit for a high interest rate, as car lenders base your loan terms largely on your creditworthiness and individual situation.
Down payments are required on subprime car loans because cash lowers the probability of default and shows the lender that you are willing to invest in the vehicle. Down payments are also beneficial to borrowers with bad credit as they reduce the amount you need to finance, lowering your monthly car payment.
While subprime lenders demand more from their borrowers, loan is reported and your credit score can benefit if you stay on top of payments. After you repair your credit score over time, you may not need to seek special financing for your next vehicle.
Always read the fine print
Whatever loan agreement you choose to accept, you should always read the fine print. There are a few things to keep in mind before signing a subprime car loan agreement:
- Prepayment penalties – Early repayment penalties are now uncommon, but in some cases lenders charge borrowers extra fees if they pay off their car loan before the predetermined maturity date. Ask the lender or special finance manager if there are any early repayment penalties in the loan agreement.
- Total Interest Expenses – Lenders must disclose your interest rate and the total expected interest expense over the life of the loan. Make sure that the verbally agreed interest and rate in your loan documents match. If you sign it and later find out it’s not what was verbally agreed upon, it’s too late to change it (unless you refinance the car later).
- Cross-reference documents – There are many documents involved in the purchase process of a car, including the loan agreement and the buyer’s order. A buyer’s order is made by the dealer, so make sure the vehicle’s information, deposit amount, and everything else is consistent between the two documents. Both items are legally binding once signed by both parties.
- Ask about postponement options – It is not uncommon for a borrower to lose income while on a car loan, and it can make it difficult to stay on top of payments. However, some lenders allow deferral programs suspend those payments for a month or two to allow the borrower to refocus to resume payments. Not all lenders offer these programs, so ask about the eligibility requirements and whether they are 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 can help you avoid default and repo.
Lenders vary, and they all have different terms for their car loans. It’s always important to know what you’re signing up for when taking out a car loan, so don’t be afraid to ask questions or ask for clarification.
Ready to find a dedicated financial dealer?
It can be difficult to secure special financing for a vehicle. Not all dealers are signed up with subprime lenders and not all dealers advertise which lenders they are signed up with.
Instead of trying to find a dedicated financial dealer who signed all-only subprime lenders, let’s get to it Auto Credit Express find one for you. With the help of our national network of special financial dealers, we look for a dealer in your area at cost price and without any obligation. complete our car loan application form start.