A laptop on a table is open and a subprime auto loans application in shown on screen.

Understanding Subprime Auto Loans

Buying a new or used vehicle is expensive, putting it out of reach for some drivers to buy without a loan. For many, getting approved for an auto loan doesn’t pose much difficulty; however, some struggle to get approved. Thankfully, some lenders provide what are known as subprime auto loans, allowing those with less-than-ideal credit scores to get a loan to purchase a new or used vehicle without buying the car outright. Since many can’t afford a car with cash and can’t get a standard loan, a subprime loan can be the only way some people can afford a vehicle.

If you’re stuck in a situation where you need a new car and find your credit on the lower end of the range, fear not; you may still be able to get a subprime loan. Finding a lender who is used to working with subprime loans is important because they understand how to deal with people who feel stuck. Unfortunately, subprime auto loans will cost more because they are higher-risk loans. Sometimes subprime loans have an interest rate of as much as twice as much as a prime loan. While these loans have their own set of potential issues, it’s important to remember they give those with bad credit an opportunity to own a car, as well as repair their damaged credit.

A Detailed Overview of Subprime Loans

Banks and lenders use the money they possess to loan out to people so they can make larger purchases. Houses are an example of things that most people can’t afford to buy outright with cash. Most people budget out their money month to month, and setting aside tens of thousands of dollars for a car is often next to impossible for most budgets. Not only that, but most of the time, income is dependent on using a car to get to work. If your car has broken down and you haven’t saved money for a new car, you’re out of luck unless you can get a loan.

Getting a loan ranges in difficulty depending on the individual’s credit score. If you have a score of 661 to 850, you are considered prime or superprime. You’ll be eligible for really good interest rates and should have no difficulty finding a lender willing to provide a loan to you. If you have a score of 501-660, you are considered non-prime or subprime. In this category, getting a loan becomes more difficult, though not impossible. Thankfully, subprime loans do exist and can provide the means to get a vehicle to those who need one and can’t get it any other way.

Subprime loans have high interest rates, ranging from 10% to 18% on average, depending on if you’re buying new or used, what your specific credit score is, and your current income. Sometimes, a low credit score is due almost entirely to the fact that someone just got approved and their credit history is very short. That can make it very challenging to get approval for loans because credit history length is a major factor in credit scores. Other factors include being late on credit payments or defaulting on a loan. While having a low credit score means getting a loan becomes more difficult, it is still possible with subprime loans.

Subprime auto loans have much higher rates on used cars than new ones. Why is this? Well, used vehicles can have hidden problems, making their value questionable. New vehicles don’t have hidden problems and, as such, are less likely to plummet in value. For example, a used car may function perfectly fine when purchased and have the transmission fail a month into owning the car. A new car will not have a scenario like this happen, but even if it did, it would be covered under warranty. The rate for used car loans is always higher, almost double the interest rate of a new car loan.

A close up shot of the hands of a business man holding a paper that reads "Need a Loan?" is shown.

Finding a Good Subprime Lender

When you have a low credit score and still need to buy a car, finding a good subprime auto lender is helpful for many reasons. A lender accustomed to dealing with people with low credit scores understands the best way to get you a good rate. They also understand that having a low credit score doesn’t mean you are necessarily financially irresponsible. Sometimes a low score can be caused by poor financial decisions, but a sudden accident, unexpected medical bill, or getting laid off could all plummet a credit score.

A lender who deals with subprime loans a lot can help those searching for loans find a decent rate. If a lender is not used to subprime lending, they will often jack up the rate to protect themselves from the possibility of the individual defaulting on the loan. Subprime lenders know what other factors help mitigate their risk, so they can sometimes loan at more affordable rates than standard lenders.

Shop Different Lenders to Find the Best Rate

Getting the best rate when looking for a subprime loan can be challenging. The old adage “Don’t put all your eggs in one basket” remains true here. If you only get one subprime loan offer, you’ll be stuck with whatever rate they decide to give you. When you have good credit, the difference in interest rate is generally pretty negligible, while the interest rates for subprime loans are often substantial. Finding a good deal means shopping around for different offers.

Find several subprime auto lenders in your area and get a proposed loan from each. Some car dealers also provide subprime auto loans, so it can be good to check with them as well. Once you’ve got a decent number of auto loan offers, you’ll be able to compare the rates better and decide which is better for you. Don’t be surprised if they are all pretty high. Sadly, all subprime loans carry significant risk for lenders, so they compensate for that risk by having large interest rates.

Providing adequate proof of an increase in your income could help lower the rate a bit. Lenders are very concerned with risk mitigation because loaning out money to someone they don’t know to buy a car is risky. They need to look at many factors. If the risk is too great, the rate will be high, or they will deny the loan. If the risk can be reduced, a lower rate is possible, depending on the circumstances.

A paper titled "Credit Scores" with the value 577 circled in red with a red stamp next to it that reads "Bad Credit" is shown.

Subprime Loans Are Available to Help Those With Low Credit Scores

Loaning money is a risky process for lenders, so they defend themselves by generally avoiding giving loans to those with low credit scores. Fortunately, some lenders do provide loans to people with low credit. These subprime loans will carry higher rates and higher fees. The average interest rate on a subprime auto loan is over 10% for a new vehicle and over 18% for a used vehicle. Buying a new vehicle with a loan is less risky for a lender, thus the lower rate. Used vehicles pose more unknown risks, thus the higher rate for used vehicles.

While getting a decent loan with a low credit score is hard, it is far from impossible. With the right techniques, such as shopping rates from different lenders, proving income, and getting a cosign, you can improve your loan rate. While it will likely still be a larger-than-ideal rate, sometimes the need to get a vehicle outweighs the negatives of a subprime auto loan. So if you don’t need to buy right now, consider improving your credit as much as possible before buying; otherwise, a subprime auto loan is a great option for those with less-than-stellar credit and who need a vehicle.