What Is a Subprime Auto Loan?

If you’ve ever been turned down for vehicle financing or quoted a high interest rate, you may have encountered the term subprime auto loan. These loans are a type of financing designed for borrowers who have lower credit scores or limited financial history. Learning the subprime auto loan definition doesn’t tell the whole story. 

Dive deeper into the question, “What is a subprime auto loan?” In addition to discovering the subprime auto loan definition, you can also find out how these types of loans work, what the risks are, and what you can do about those risks. 

What is a subprime auto loan?

A subprime auto loan is a car loan for borrowers with low credit scores. Lenders consider borrowers with a thin credit history or low score to be higher risk. 

If a lender offers a consumer an auto loan when they are risky borrowers, the loan may be subprime. The less favorable terms are meant to protect the lenders, but they can make buying a car more difficult and more expensive for you. 

What credit score range qualifies as subprime?

There is no set credit score range that all lenders use to define the subprime threshold. However, borrowers are typically eligible for prime loan options if they have credit scores above 660. You may qualify for a prime or near-prime loan if you have a score above 600. 

Most lenders will either offer a subprime loan or deny your application if you have a score below 600. Other factors that lenders consider include your debt-to-income ratio and your income stability. If you can reasonably afford the vehicle you are trying to finance, you may be more likely to qualify for a loan, even with subprime credit. 

How lenders define subprime vs. prime borrowers

Lenders consider your payment history and length of credit history when determining how to handle your application. They will also review your credit report for past delinquent payments or collections. If you have missed payments in recent years, you could be offered a subprime loan, even if your score is borderline. 

On the other hand, you’ll need to meet the lender’s credit score requirements and have a strong credit profile to qualify as a prime borrower. Prime borrowers enjoy better interest rates and terms, which could save you thousands of dollars over the life of the loan. 

How subprime auto loans work

A subprime auto loan works like any other car loan. You borrow money to purchase a vehicle and make fixed monthly payments for a set period, such as 60 or 72 months. However, there are some differences.

Higher interest rates

Lenders view subprime loans as being higher risk. If a person has a lower credit score or a spotty payment history, they are viewed as more likely to miss a payment or default. As a result, lenders charge higher interest rates. It’s not uncommon to see rates in the double digits, which can drastically impact the total cost of the vehicle over time. 

The good news is that you may be able to refinance into better terms later, provided that your credit score improves. If you decide to take on a subprime loan, don’t bet too heavily on your ability to refinance. Make sure you can afford to make the payments as is. 

Shorter loan terms

Lenders may limit how long you can finance a vehicle for. For example, you may not be eligible for 72 or 84-month financing. Instead, the lender may limit you to a 60-month term, which means your monthly payments would be higher compared to a longer loan term. 

Larger down payment requirements

Depending on your financial history and credit score, you may not be able to qualify to finance the vehicle you want. That leaves you with two options. You can finance a cheaper vehicle or put more money down to cover the difference. 

While making a larger down payment can reduce your monthly payments, it can take time to save up enough cash. If you need a vehicle in a hurry, putting more down may not be an option. 

The risks of taking out a subprime auto loan

A subprime auto loan can help you get into a vehicle when you don’t qualify for prime lending options. However, there are risks to consider, such as:

• Higher Total Cost: High interest rates mean you’ll pay much more over the life of the loan 
• Negative Equity: You could owe more than the car is worth 
• Budget: Larger monthly payments can strain your finances 
• Repossession: Missing payments can lead to losing your vehicle 

Sometimes, borrowers get stuck in a cycle where they refinance or roll over debt into new auto loans. 

How to improve your chances of getting a better rate

If you want to qualify for a prime auto loan, you’ll need to:

• Build positive payment history
• Lower your credit utilization
• Avoid new hard credit checks
• Save for a larger down payment 

Credit-building platforms like Kikoff can be invaluable for adding positive payment history and strengthening your score. 

Conclusion

Don’t settle for a subprime auto loan, especially if you have time to work on your score. Start building a positive credit history with Kikoff.