When you’re looking for an auto lender, it’s critical that you make comparisons to find the best deal on an auto loan. This is especially true if you have a subprime credit score. If you are a subprime borrower in need of a new or used vehicle, then you may want to know about subprime lenders and how to find the best one for your financial needs.
In this article, we’ll discuss the general terms of subprime loans and what you need to know before you apply for one.
What Is a Subprime Auto Loan?
A subprime auto loan is an auto loan meant for borrowers who have subprime credit scores.
Take a look at the five credit score levels:
- Deep subprime (below 580)
- Subprime (580-619)
- Near-prime (620-659)
- Prime (660-719)
- Super-prime (720 or above)
According to Experian data, 14.39% of borrowers have deep subprime credit, while 11.92% have subprime credit.1 Ideally, a borrower should have a score higher than 620 points, which is a near-prime rating.
A subprime car loan generally has flexible qualification requirements. Subprime lenders typically care more about your ability to repay the loan on time than your credit history. However, remember that every lender has a minimum credit score requirement. It’s essential to inquire with more than one auto lender if you need funding.
How a Subprime Auto Loan Works
A subprime auto loan works exactly like a traditional auto loan. The only difference is the minimum credit score required for approval, which is typically low.
Subprime borrowers who are approved for an auto loan will sign a financial agreement. Payments are made monthly, and consist of the principal balance, interest fees, and any additional costs. Once the auto loan is completely paid off, the lender will remove the lien from the car title. The borrower will then receive the lien-free title, which indicates they are the sole car owner.
Pros and Cons of Subprime Auto Loans
While a subprime auto loan seems like an ideal choice for low-credit borrowers, there are some disadvantages. Take a look at some of the pros and cons of getting an auto finance loan with poor credit below.
| Pros of Subprime Auto Loans | Cons of Subprime Auto Loans |
| Accessible to those with low credit scores | Higher interest rates compared to prime loans |
| Can help improve credit score if payments are made on time | Often come with higher monthly payments |
| Enables vehicle ownership for those who might not qualify for prime loans | May have stricter terms and conditions |
| Flexible requirements | Potential for vehicle repossession if payments are missed |
How To Avoid Predatory Lending Practices
Before you go looking for a subprime lender, it’s critical to be aware of predatory lending practices. Unfortunately, it is not uncommon to come across a predatory lender while looking for funding with bad credit. According to Gallup, 21 million U.S. adults have been personally victimized by scammers.2 But knowing what to watch out for can help you avoid scams!
- Research the Lender: It’s critical to research a lender before signing a loan contract. Look at online reviews and ratings from the Better Business Bureau (BBB). A lender with a history of complaints related to unfair practices should raise a red flag.
- Check for Hidden Fees: Predatory lenders often hide fees in the loan agreement that can significantly increase the cost of a loan. Look out for processing fees, document fees, and early repayment penalties. These should be disclosed upfront.
- Avoid Lenders Who Pressure You: Predatory lenders often use high-pressure sales tactics to trap borrowers into unfavorable terms. Be cautious of lenders who pressure you to make a quick decision or to take out a loan that is beyond your means.
- Look for Red Flags: Be wary of lenders who don’t require any credit check or who offer loans that sound too good to be true. If you are approved without providing personal details, you may be dealing with a scammer.
How to Improve Your Credit Score for Better Loan Terms
Borrowers with good credit scores generally get the best loan offers with the most favorable terms. If you have a subprime credit score, you may wonder how to quickly improve your creditworthiness.
Here are some helpful tips on how to boost your low credit score to get better loan terms.
Avoid Late Payments
Your payment history counts for 35% of your total FICO Score. If you miss payments, they can end up on your credit report. Late payments will significantly decrease your credit score and remain on a credit report for up to seven years! If you want to improve your credit, you can avoid late payments by signing up for autopay or monthly payment reminders.
Reduce Your Debt
Your credit utilization is a percentage that represents the amount of credit card debt you are using compared to your total credit limits. A high credit utilization rate can hurt your credit and prevent you from increasing your score. The best way to improve a subprime score is to work on reducing your outstanding debt.
Here are a few ways to quickly pay off personal debt:
- Use the debt avalanche or snowball repayment method.
- Consolidate high-interest debt with a debt consolidation loan or balance transfer loan.
- Pay more than the minimum monthly payment.
- Work with a nonprofit credit counseling organization.
Avoid Multiple Credit Inquiries
Applying for too many new credit products could further decrease your bad credit score. Every application requires a bad credit check, which deducts up to ten points from your score. If you want a higher credit score, avoid applying for more than six new financial products every two years.
Check Your Credit Report
It’s critical to monitor your credit reports annually. Unfortunately, incorrect information on a credit report can decrease your credit score. Use the Annual Credit Report website to get your free credit reports from the three major credit bureaus every 12 months. If you notice a mistake, you can file a dispute with the credit bureau.
Subprime Auto Loan Alternatives
Low-credit borrowers looking for auto finance options typically use bad credit auto loans. But there are alternative subprime loan options available that can help you purchase a new car.
Home Equity Loans
A home equity loan is a secured loan option available to homeowners. These loans use the equity in real estate properties as collateral in exchange for high loan amounts. You could use your home equity to get enough money for a new car. However, you risk losing your home if you fail to meet the financial obligations of the home equity loan.
401(k) Loans
A 401(k) loan allows you to borrow money from your retirement savings account without paying taxes and penalties. However, the amount you are able to borrow depends on the specifics of your employer’s plan. However, many financial experts recommend that you avoid borrowing from your retirement account due to lost earnings. In addition, borrowers who depart their jobs during the repayment period will be forced to repay the full outstanding loan amount quickly.
Personal Loans
A personal loan is an unsecured or secured installment loan. Personal loans can be used for all types of expenses, which makes them ideal for emergency situations. Using a personal loan to buy a new or used car may help you secure better rates with a subprime score. But you will have to look for a personal loan lender that has flexible credit score requirements and competitive rates.
Credit Cards
Many people use credit cards to purchase vehicles because they are convenient. However, using credit cards for large purchases only makes sense when you can pay off the bill in full. Credit cards generally have very high interest rates. If you use a credit card like an installment plan, you may end up paying substantial interest fees and end up stuck in a debt trap.
FAQs About Subprime Auto Loans
Financial institutions typically ask for proof of income, such as recent pay stubs, proof of residence, a valid driver’s license, and your Social Security number. For applicants with limited credit histories, additional documentation might be required to demonstrate financial stability or existing assets.
A higher down payment can significantly improve the terms of your subprime loan. It reduces the loan amount, potentially lowers the interest rate, and may help in securing loan approval from auto finance companies, even for borrowers in the deep subprime category.
Yes, refinancing a subprime auto loan is a possibility, especially if your credit score improves or you find more favorable terms with another lender. This can reduce your monthly payments and the total interest paid over the life of the loan.
Interest rates for subprime loans are generally higher than those for standard auto loans. Rates can vary widely based on the lender, your credit score, and the overall loan terms, but subprime borrowers can expect rates significantly above prime rates.
Yes, some financial institutions specialize in subprime loans and offer tailored auto finance options for borrowers with poor credit scores or limited credit histories. These lenders often provide more flexible qualification criteria and assistance throughout the loan process.
The repayment terms for subprime car loans can range from 24 to 72 months, similar to standard auto loans. However, due to higher interest rates and risk factors, some subprime loans might have shorter terms to reduce the lender’s risk exposure.
CreditNinja: Finding the Best Subprime Auto Lender
Finding the best supreme loan is about finding a lender that offers you the best terms. Remember that the interest rate is the amount you pay to borrow funding. A high interest rate will result in a high monthly payment and excess fees.
You may have to take out a subprime loan if you have bad credit. These loans generally have higher than average interest rates. But by taking time to inquire with multiple lenders, you could find the best loan offer for your budget.
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