Risks of Subprime Auto Loans Auto Express Credit
There is always a risk involved in taking on new credit, including auto loans. Whether you’re taking out a traditional car loan or working with a subprime lender, there are risks to consider before signing that dotted line.
What is a subprime auto loan?
First, let’s define the financing of risky vehicles.
Subprime is a term used to describe bad credit borrowers, generally defined as a borrower with a credit score of less than 670. Rather, it is a generic term, encompassing loans for borrowers with poor credit. tarnished and the lenders who provide them. Typically, subprime lenders are third party lenders registered with special finance dealers.
These lenders often help distressed borrowers who are struggling to meet traditional auto loan requirements. This can include borrowers with no credit, bad credit history, bankruptcy, divorce, and other bad credit situations.
Risks associated with secured auto loans
Every time you take on new credit, whether it’s a credit card or a car loan, you’re taking some risk.
If you agree to pay off a car loan over a few years, then you are forced to make those payments or risk default and possible repossession. Defaulting and pensions can dramatically lower your credit score and make it harder to get new credit for at least a year, in most cases.
Auto loans are generally secured, which means that the vehicle is collateral for the loan. If you break the contract, the lender usually repossesses – letting you pay off the loan balance and you are left without a vehicle.
Auto loans can last from four to eight years, sometimes longer. It’s a big commitment. If you were to lose your income during this time or if you had other financial difficulties, it could lead to difficulty 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 within the subprime rating range, you may be paying more interest. For some borrowers, this could mean paying more than the value of the car. While it’s common to pay a little more than the value of the vehicle when you finance, a high interest rate could mean thousands more.
Taking out a car loan is a balance between affordability, vehicle value and stability. If you think you are financially able to pay off a car loan and can fight for a good interest rate on a decently priced vehicle, then auto financing might not be that risky for you.
Considerations for financing risk vehicles
If your credit score needs a bit of work and you’re thinking about looking to risk financing, here are some things to know:
- Interest rates on subprime auto loans are generally higher than traditional auto loans
- Most subprime lenders require a down payment, usually at least $ 1,000 or 10% of the vehicle’s selling price.
- Subprime lenders have vehicle requirements, typically forcing borrowers to choose a vehicle that is less than 100,000 miles and less than 10 years old.
- Subprime lenders typically can’t help borrowers with a repossession that occurred less than 12 months ago
- Borrowers with multiple recent defaults on their credit reports may not be eligible (such as a recently rejected bankruptcy)
While a subprime car loan may require a down payment and the interest charges may be higher than traditional financing, this is usually because borrowers with low credit are looking for subprime auto loans. A lower credit score is usually the cause of a high interest rate, as auto lenders largely base your loan terms on your credit rating and your individual circumstances.
Down payments are required with subprime auto loans because the cashout reduces the risk of default and shows the lender that you are ready to invest in the vehicle. Down payments are also beneficial for borrowers with bad credit because they reduce the amount you need to finance, which in turn lowers your monthly car payment.
While subprime lenders demand more from their borrowers, the loan gets flagged and your credit score can benefit if you stay up to date on payments. Once you have repaired 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 want to accept, you should always read the fine print. There are a few things to check before signing a subprime auto loan agreement:
- Penalties for early repayment – Prepayment penalties are rare these days, but in some cases, lenders charge borrowers additional fees if they pay off their car loan before the predetermined end date. Ask the lender or special financial manager if there are any prepayment penalties in the loan agreement.
- Total interest charges – Lenders must disclose your interest rate and the total anticipated interest charges throughout the life of the loan. Make sure that the interest rate agreed upon orally and the rate stated in your loan documents match. If you sign it and find out later that it is not what was verbally agreed, it is too late to change it (unless you refinance the car later).
- Reference documents – Many documents are involved in the process of buying a car, including the loan agreement and the buyer’s order. A buyer’s order is done by the dealership, so make sure the vehicle information, down payment amount and everything in between are consistent between the two documents. Both articles are legally binding once signed by both parties.
- Learn about deferral options – It is not uncommon for a borrower to lose income during a car loan, and it might be difficult to stay up to date on payments. However, some lenders allow deferral programs that suspend payments for a month or two to allow the borrower to redirect to resume payments. Not all lenders offer these programs, so ask what the requirements are to qualify for them and if they are offered by the lender. You never know – you might need it if you run into financial difficulties in the future and it might help you avoid defaults and pensions.
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 getting when you take out a car loan, so don’t be afraid to ask questions or seek clarification.
Ready to find a special financing dealer?
It can be difficult to find special financing for a vehicle. Not all dealerships are registered with subprime lenders, and not all dealerships advertise which lenders they are registered with.
Instead of trying to find a special finance agency yourself that has signed up subprime lenders, let us at Auto Express Credit find one for you. By using our national network of specialist financing resellers, we are looking for one in your region at cost price and without obligation. Fill out our auto loan application form to get started.