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Why You Should Avoid Subprime Auto Loans

  • December 10, 2019

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subprime auto loans

You are at a competitive disadvantage in most American job markets if you do not have a car. Further, the ability of your family to enjoy many of the perks of life is inhibited as well.

Consequently, people are willing to do anything they can to have one.

This can be particularly difficult if you’re having credit problems. However, the good news is that there are people out there willing to help. The bad news is that many of them are more concerned about their own needs than yours, which is why you should avoid most lenders offering subprime auto loans.

What Is a Subprime Auto Loan?

Made primarily to borrowers with low credit scores, these loans often come with exorbitant interest rates and they entail a great deal of risk. According to the Consumer Financial Protection Bureau (CFPB), there are five levels of auto loan credit scores.

These are:

  • Deep subprime (credit scores below 580)
  • Subprime (580 to 619)
  • Near prime (620 to 659)
  • Prime (660 to 719)
  • Super prime (720 or higher)

Given the significance of the automobile to an American lifestyle, there are also lenders out there willing to finance cars for people who have no credit history whatsoever.

Why Do They Exist?

These loans can be exceptionally lucrative for financiers who are willing to put up with the risks. In many cases, dealers who both sell the cars and provide financing offer these loans. Known as “buy here – pay here” lenders, these dealers repossess cars and sell them again if borrowers default.

Meanwhile, they can pretty much demand whatever price they want. Most people with bad credit don’t put up much of a fight on price because they are so happy to find someone willing to finance them.

And, as you might have guessed, interest rates in the realm of 15 percent and higher are common to the marketplace. By way of comparison, consider this data from US News and World Report:

Average Used Auto Loan Rate by Credit Score – October 2019

Credit Score    Interest Rate

750+                4.17%

700-749           4.19%

650-699           7.37%

450-649           12.76%

449 or less      15.00%

Keep in mind; those figures are for mainstream lenders. People dealing specifically in the subprime market can go much, much higher — and they often do.

What’s the Risk?

The primary concern for you as a borrower is grounded in the interest rate you’ll pay to get one of these loans. However, it also ties into something a lot more insidious. You’ll pay far more for the car than it is really worth. Think about it, you’re buying a used car at the top of its market valuation, financing it at an astronomical interest rate and carrying a long loan term to make the payment fit into your budget.

Every car-buying advisor will tell you this is the absolute worst way to buy.

You’re going to owe far more on that car than it’s worth if you need to sell it or it’s involved in an accident and declared a total loss. This means you’ll have to come out of pocket to pay off the loan after your insurance company pays you the wholesale value of the car — which is all most insurance policies will do.

Already struggling with credit issues, you just got one more bill hung around your neck — for a car you don’t even have anymore. This can be true regardless of the type of lender with which you're working, and it’s why you should avoid subprime auto loans.

The debt experts at Bills.com, part of the Freedom Financial Network, recommend carefully researching all your financing options — like banks, credit unions and online lenders —  before even considering a subprime loan with a high interest rate.

You’ll be much better off in the long run if you can get a car without paying double-digit interest on the loan.

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