What Is a Subprime Auto Loan?
The loan applicant is not seen as creditworthy enough for the bank to approve a loan. They are also called “near-prime” and “deep subprime” borrowers. Nearly 40 percent of all new auto loans were made to these subprime customers during the first five months of 2006. In fact, they are making car loans available to people who have bad credit ratings. With the right care and precautions, you can get a great car at a great price. Subprime auto loans are not identical to bad credit. When it comes to car finance, you will find good and poor loans available on the market, depending on your own specific situation. If you see a car that you really like, you may likely want to jump on the opportunity of getting it before someone else does. If the car is a limited production model or a custom special edition built by a major car manufacturer, it could be snapped up quickly by those seeking such vehicles.
This includes celebrity-owned cars which have been specially made for them. You may also see plenty of vehicles at local car dealerships daily and hence feel unsure about taking the risk of waiting for another day or week if that specific car is allocated to someone else. Buying a new car should not be seen as something that is just limited to society’s wealthiest people. Auto loan finance options are no longer only for the minority. Even people with poor credit ratings can now benefit. Indeed, according to recent statistics from one bank, they have seen an increase in loans going to subprime borrowers on many occasions since the turn of the century. In contrast, more prime borrowers have declined in numbers, with prime borrowers now accounting for only half (50%) of the total market. The current situation may not last long. With manufacturers and distributors seeing financial problems happening worldwide because of unstable situations, some are now fretting about what will happen next and what will happen with auto loan finance if this becomes worse over time?
How does a Subprime Auto Loan work?
Subprime loans are primarily granted to buyers with bad credit and low income, but it can also be given to buyers who have a job or assets in addition to a bad credit score. If you have little or no credit history, you will likely need to apply for a subprime loan. There are several lenders out there that specialize in these bad credit car loan products. While a “typical” lender may invest $1 million in outstanding loans, lenders specializing in subprime loans may put that figure closer to $50 million. Still, with so many banks and other lending agencies turning away less than perfect credit consumers, several aspects of the subprime market are receiving an increasing share of business from car buyers. Most notably, these individuals are generally younger, and they are first-time car buyers who are new to the idea of auto financing altogether.
Where can you find an auto loan if you have bad credit?
These days, many different sources can provide funding for bad credit borrowers. Many dealerships will finance these buyers because they want their business, and they realize that bad credit car owners continue to pay their auto loans on time, more often than not. When most people start with a paycheck of only $350 at the end of the week, they’re not going to buy an expensive car regardless of how good the interest rate is. They will most likely opt for buying the vehicle used or cheap, adding personal features like a newly installed CD stereo system or custom paint job as long as it works! By having cheaper rates for subprime borrowers, many dealers can increase sales and offer poorer customers the chance to hit the open road while enjoying some of America’s lifetime dreams like:
- owning your own home;
- traveling and visiting places you’ve never seen before;
- buying yourself that favorite product from the big box store like electronics or furniture you’ve been looking for at a price your budget can afford.
The Risks of Subprime Auto Loans
The general rule of thumb in the world of financing is that you will most likely be looking at a subprime loan if you have very little income. This is an obvious fact since credit information on these buyers is remarkably scarce or even non-existent. These auto loans are advantageous for many poorer individuals who would otherwise either spend too much for an expensive car that can barely get them from point A to B or, worse, no car at all. However, one risk still prevalent in subprime loans is high default rates leading to repossessions, causing banks to lose money. This also causes the owners or stockholders of these companies to suffer when fewer profits are made, and fewer shareholders’ equity becomes available for lending to other car buyers. Let us now move on to Subprime Auto Loan Benefits: Auto loan experts advise that one of the great benefits of subprime auto finance comes from having to pay more money for your purchase but rather from helping you stick to a budget by keeping payments low and affordable. By securing a loan to help you get a new vehicle, keep in mind that you could lose it if any security devices based on your car’s title are violated, like missing several payments at once in some cases.
How to Apply for Subprime Auto Loans?
It would help if you had a credit score of 640 or higher. And your income needs to be at least 2.5 times the value of the monthly payments on the car you want to buy.
A rule of thumb is if you make under $29,000/year and have a credit score of 640 or higher, then you have a pretty good chance of getting financing. Again, your income might need to be at least twice the amount of your monthly car payment. Instead of paying off your car over 5 years like most people, you would be paying it off over 12-15 years.
Requirements for Subprime Auto Loans
- identification of car, type, and features
- time that you will be servicing payments (most car loans require first 4 months financed on the vehicle before loan payment kicks in)
- length of loan term
- rate of interest
- Loan amount
- down payment.
- Details about the posted rate.
- amount owed for loan balance
- security deposit required
- interest rate
- an agreement that no leases are allowed
- lender to submit to the jurisdiction of Federal Government
- list any exempt property vehicles
- list specific manner loan is paid
- actual written agreement
- as to whether asking loan agent to take you for a test drive
- actual driving record
- list all violations
- motor vehicle possessors license
The important thing is to shop around and look online for banks or lenders that specialize in lending money that they know their chances of being paid back are better. In subprime loans, the default rate is usually higher because a poor credit score usually turns into more expenses in these cases. However, most loans will offer you some warranty on the vehicle that may pay for you any deficiencies in value if you were to resell the car at some point. It runs into mechanical problems that were known at the time of sale and were not disclosed. From there, it is just a matter of seeing how much you can afford per month and finding out how people are paying off these types of cars. Another way to do so is to contact your local automotive dealer and ask them what you need. Frequently, they will have different banks that they will work with already, so all you have to do is give them your information, and they can submit your request fee to have it processed. This takes a little longer as not everything is online with Internet banking, but make sure you know what you are doing before you dive in headfirst.