People who need to have their car purchases financed don’t always have a sterling credit record. In fact, very few meet the requirements that most lenders would categorize as an excellent borrower. The majority of those who opt for an auto loan have something to improve in their current financial picture.
Fortunately, there are different types of car loans out there. We will talk about one of the most popular ones: the so-called subprime auto loan.
A subprime auto loan is a financial product aimed at people with less than stellar financial credentials. Oftentimes, this is the only vehicle for such people to get assistance with an auto loan.
Subprime auto loans became big business between the years of 2001 and 2004. At the time, financial institutions had large cash reserves. They sought out the higher returns that could be had from charging higher interest rates to subprime borrowers.
- The highest credit rating one can get is 850. This type of loan is typically approved for those who have a score of 619 or lower.
- A subprime auto loan is also ideal for those with limited credit histories. This could refer to individuals who worked part time or have been making money through freelance projects.
Just like any other loan product, having a good understanding of subprime auto loans leaves you better prepared for what’s to come.
Here are three things worth knowing about this particular loan product.
1. Total Cost of Ownership
It’s prudent to know how much your monthly payments will be. However, it’s wiser to know what the overall cost of the loan is. According to Chris Kukla at the Center for Responsible Lending, the longer the loan, the more interest you’ll end up paying. This is especially true if you are buying a used car. “Let’s say you buy a 5-year-old car and slap a seven-year loan on that. Assuming your car can hold up 11 to 12 years, you’ll still end up owing money on the car,” he explains.
Figure out the amount of interest you’ll pay over the life of the loan. Know what fees are going to be associated with it. Armed with the numbers, you can then make a more informed judgement as to whether or not the loan plan you’re looking at is worth it.
2. Credit Problems
If you have had credit problems in the past, it’s always good to have a realistic assessment of what you can afford. You could find yourself in a much bleaker situation financially if you default on that car loan. We all need transportation to get to work or some other significant destination. The car you choose should be a make and model that’s within your budget.
3. Lender Availability
Prime borrowers or those with a credit score over 680 have an easier time getting a low-interest auto loan. Those who don’t belong to this tangent may have a more of a challenge. Nonetheless, there are things you can do to improve your chances of getting approved for a subprime auto loan at lower rates than normal. One tip would be to review the records you have from credit reporting agencies and have discrepancies corrected.