A subprime car loan is a type of auto loan given to borrowers with bad credit. These loans often carry high interest rates and may require large down payments. The terms and fees associated with these types of loans can vary from lender to lender.
Consumer Reports recently released a Data Point report that surveyed interest rates across subprime auto lenders. They found that the interest rate for a typical subprime loan was twice as high as the average interest rate for prime loans. And they noted that the risk of defaulting on a subprime loan is much higher than for a standard auto loan.
Historically, cars have been a symbol of economic success. It was a major incentive for people to buy a car and take the time to make monthly payments. But as the mortgage market heated up in the ’08 crisis, millions of Americans recklessly tapped into home equity.
With a growing need for a car, lenders are betting that borrowers will do whatever they can to keep their vehicles. This is where predatory tactics come into play. For example, lenders may repossess a vehicle if it’s not paid off. In addition, a longer repayment period can decrease the value of the car.
The interest rate for a subprime loan is higher because lenders think that borrowers are a higher risk. The best way to avoid paying high interest on a subprime loan is to shop around for the best rates. There are online tools and marketplaces to help shoppers find lenders. Likewise, lenders who are more cautious about accepting low-income borrowers may not have as high of a maximum loan amount.
Some subprime lenders will ask for documents that aren’t readily available to the average consumer. These might include tax forms or bank statements. Others will accept these documents in place of pay stubs. However, they aren’t as accurate as a credit score.
A subprime auto loan can also carry higher origination and service fees, as well as longer loan terms. Longer repayment periods can lower monthly payments, but they can also increase the total cost of the loan. As a result, it’s important to choose a car that’s within your budget.
If you need a new car, you should consider getting pre-qualified. That way, you can avoid being turned down because of your credit score. Likewise, you should shop for a car with a fixed interest rate. Otherwise, you’ll be paying an unexpected rate hike.
If you want to save money on your next loan, you should find a lender that is flexible with its minimum requirements. The better lenders will be able to work with you to find the most affordable car for your needs.
It’s also possible to shop around for a subprime car loan. There are online tools to help consumers understand the loan shopping process and to identify which types of auto loans are best for their needs. While shopping for a loan may be a daunting task, it can be a lot easier if you have a little information.