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If you are among the 60% of American consumers with poor credit, then you will need to know a bit about subprime auto loans and how they work. Before you can get a new vehicle (or even a used one in most cases), you will need to find financing that works for your budget and your desires. Auto loans can be confusing at the best of time; when you throw the subprime aspect into the mix, you can truly have a conundrum on your hands. How is a subprime auto loan different from a regular loan? Are these loans good options for consumers? Interest – The interest rate applied to subprime auto loans is often quite a bit higher than that of a standard loan, offered to a customer with good credit. For instance, if a consumer with good credit were offered a loan with an interest rate of 4%, a subprime consumer might be able to get a loan for the same amount at 10 or even 12%. The increased interest rate is due to the increased level of perceived risk on the part of the lender. They are taking a chance on you and they wish to be well compensated for it.
Loan Amount – Another way in which subprime auto loans differ from standard loans is in the amount the loans are available for. While this might not be a serious hindrance to consumers, it does represent an obstacle. For instance, while a consumer with good credit might be able to finance any vehicle on a dealership's lot, a subprime consumer might find themselves limited to a specific (low) dollar range. This works on the lender's behalf to reduce risk, should you default on the loan. Even though the lender would have the vehicle (through repossession), they would never recoup the actual costs of the car. Therefore, by limiting the amount of money for which you are approved, a lender reduces the potential monetary loss should you abandon your responsibilities.
Terms – Some subprime auto loans also offer different terms than standard loans. This applies to the length of the loan. For example, a consumer with perfect credit might be able to finance a vehicle for six years, while one with bad credit would only be able to finance a vehicle for three or four years. This actually works in the buyer's favor – the longer the terms of the loan, the more you pay in interest fees. However, it also results in a lower car payment. In contrast, a shorter loan saves money in interest fees, but has a higher car payment. These are only a few of the myriad ways in which subprime auto loans differ from their standard brethren. While it can certainly be feasible to take out a loan of this nature, it might not be the best option. A better choice would be to engage in credit repair prior to applying for an auto loan. If you are able to bring your credit score back up into the good range with credit report repair services, then you will be offered much more attractive loan terms and you will find that you save a considerable amount of money over the life of the loan.