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What is a Subprime Auto Loan?

What is a Subprime Auto Loan?

If you have ever let your credit report take a substantial hit after defaulting on a loan, or allowed a credit card to go into collections or messed with the IRS when it came to filing your taxes, then you probably assume you’d never convince a bank or credit union to give you a car loan. Fortunately, however, there are lenders who are willing to take incredible risks with the money they lend out and deciding who they will lend to. These lenders exist in what is known as the subprime market.

Subprime Lending

Face it, no one’s perfect. Everyone makes mistakes. We were all young once, and speaking of which, if you are young and you’ve never used credit for anything before, you’re also a candidate for the this type of lending market.

Primarily banks and credit unions like to offer loans to people with established histories.

Primarily banks and credit unions like to offer loans to people who have treated previous lenders well by paying back their debt obligations on time.

Primarily banks and credit unions like to offer loans to people who have steady employment and a good salary that is easily verified.

And if you aren’t a part of the “prime” group above for any one of those reasons, then your world is in the “subprime.” There are lenders out there with money to give to people who do not have an established borrowing history, or have not treated their past lenders well by paying back their debt obligations on time, or do not have a steady income at the moment. These companies are known as subprime lenders because they offer loans to persons with credit that is considered subprime.

These lenders offer all types of loans for various situations including autos, personal loans and even credit cards. The only type of loan you will hardly ever see put forward by this type of lender is the home mortgage or home equity loan - some risks are just too big for anyone to take.

Well Worth the Risk

You might be asking yourself why it is that these lenders would take the risk of offering money to people with bad credit, none at all or no stable income. Well, put simply, they do it because they make a whole lot of money at it by charging their borrowers exorbitant interest rates on the loans they take out. Whereas the average interest rate for a 4-year car loan in 2007 was 7.51%, someone who has subprime credit and gets the money for their car from a subprime lender can easily expect to pay nearly double that - fourteen percent on a 4-year car loan. Needless to say, this nets an extreme amount of profit for the subprime lender, which makes the higher number of defaults that they have to deal with worthwhile.

It May Not be Worth it for You

Before you turn to the subprime market for an auto loan, you should really think twice. If there is any hope of salvaging your score enough to qualify for a more moderate loan you should take it without hesitation. Pay off old debts like card balances a couple of months before you apply for the loan. Your wallet will thank you in the long run.

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