Credit scores are perhaps the most important factor in getting approved for an auto loan. The higher your credit score, the lower your interest rate. But the lower your credit score, the higher your interest rate. The average APR on a car loan for a new car for someone with prime credit was 3.65% to 4.68% as of the first quarter of 2020. In contrast, the average APR for someone with subprime credit was 11.92% to 14.39%. An APR on a subprime auto loan can even exceed 29%. Let’s compare two loans that have the same amounts, down payments, and loan terms, but different APRs: 3.65% for an example of a traditional auto loan and 14.39% for an example of a subprime auto loan. Here’s how they compare:
How Subprime Auto Loans Work
The process for getting a subprime auto loan is similar to getting any other type of loan. You can typically apply online or in person at a financial institution, completing a form with your basic personal information. When you take out an auto loan, the lender pulls your credit history to see if you’re eligible for a loan and if so, at what interest rate. Based on your credit profile, lenders can approve or deny you an auto loan. A subprime auto loan targets borrowers with subprime credit scores, or those with scores less than 619, who are denied prime loans. A low score won’t necessarily prevent you from getting an auto loan, but your interest rate will likely far exceed what you’d pay on a regular auto loan. For some people, the result is that they spend more in total interest and have a more difficult time repaying the loan. Fees on subprime auto loans vary by lender and are similar to what you’d potentially face with a traditional auto loan. They include:
An origination fee: A processing fee for taking out the loanA prepayment fee: A charge for paying off your loan before the agreed loan terms
Pros and Cons of a Subprime Auto Loan
Subprime auto loans may provide financing for borrowers who can get traditional loans, but in terms of interest rates, they are also expensive. Weigh the pros and cons before deciding whether one is right for you.
Pros Explained
Loans for bad credit: If you have bad credit or not much credit to your name, a subprime auto loan can help you get a car when you really need it.Loans for low income: Similarly, if you have low income, you may find a subprime loan is your only option for financing a car.
Cons Explained
High interest rate: Interest rates on subprime auto loans tend to be much higher compared to regular auto loans. The more you pay in interest, the more extra money you’ll pay over the total life of the loan.High monthly payments: While you might be able to get a loan, you may not be able to afford the higher monthly payments due to the exorbitant interest rates.Chance of repossession: With higher interest rates and monthly fees, you could fall behind on payments. If you miss a payment, the lender can repossess your car.
