How to Get the Best Auto Loan Rates and Terms with Subprime Credit
By John Campbell
If you need an auto loan but find out your
credit score isn't exactly very good don't
throw in the towel just yet. There are still
loans available to borrowers with subprime
credit.
What is considered subprime credit, you may
ask. Subprime credit is essentially bad credit.
If you've missed payments on credit cards
or utilities, have too many debts or filed
for bankruptcy in the last 7 years, your credit
score could take a beating. Generally, most
lenders consider subprime credit scores to
be 679 or below. The farther down your score
is, the harder it will be to get loans with
acceptable rates and terms. If your credit
score is below 575
Your best bet to get a subprime loan
is to shop around for a direct lender
who will provide you with an affordable
auto loan. The interest rate you pay on
a subprime auto loan may approach 20 percent;
three times what you might pay for a loan
with good credit. The high interest rate
on a subprime loan may price you out of
the market for a brand new vehicle. A
cheaper used vehicle may be your only
alternative.
Direct lenders will often place restrictions
on the used vehicles you may purchase
with a subprime loan. Many lenders will
only allow you to purchase a used vehicle
that's less than 5 years old with fewer
than 60,000 miles driven. An older vehicle
with more mileage could need expensive
repairs or other costly maintenance more
often; draining your funds and increasing
your risk of defaulting on your loan.
The most important thing to consider
when shopping for a subprime loan is if
you will be able to afford it. With its
higher interest fees, a subprime loan
on a used vehicle can cost over $100 more
than a comparable prime rate loan for
a new vehicle. If you can't make the payments
on your subprime loan you'll lose your
vehicle and end up with an even lower
credit score.
On the plus side, if you can afford the
payments on a subprime loan from a direct
lender your payments will be reflected
on your credit report and your credit
score will likely go up.
If you get approved for a subprime auto
loan, the lender may place restrictions
on where you may purchase your next vehicle.
You may be required to purchase the vehicle
from a reputable dealership. This restriction
helps protect you from buying a "lemon"
without a warranty from a private owner.
The more money you have to spend on repairs,
the less likely you'll be able to pay
off your loan.
If you can't get approved for a loan
from a direct lender some auto dealerships
will be willing to get you approved for
a subprime loan. This can have a number
of costly disadvantages, however.
The biggest disadvantage to getting a
subprime loan directly from a dealership
is that you're at their mercy. If the
car you want is sitting on the dealership's
lot, you'll have to accept any loan terms
or conditions the dealership presents
to you or you won't get the car.
Some dealerships will inflate the price
of vehicles you are interested in purchasing
with their subprime financing.. You may
also be required to make a large down
payment before being approved for financing
from the dealership. Even dealerships
that offer low introductory financing
rates may drastically increase these rates
after you've started making payments.
You should also watch out for dealerships
offering long-term loans. If you can't
pay off your car before the warranty expires,
you could end up paying for costly repairs
while still making loan payments. The
depreciation of the vehicle at the end
of a long-term loan could leave you with
a vehicle with little or no trade-in value.
Avoid obtaining financing from dealerships
that won't report your timely loan payments
to any of the three national credit bureaus.
If you can't use your loan to build credit
you may not be able to refinance the loan
or obtain loans with better rates in later
years.
If you have a subprime credit rating,
obtaining an auto loan is not something
to be done without careful research of
all your available financing options.
When in doubt, ask lots of questions and
make sure you have all loan terms and
conditions spelled out in writing before
agreeing to any loan.
Be informed so you can make the financial
decisions that are right for you. You'll
get better rates and may improve your
credit score while doing it.
© cashbuzz.com
John Campbell is the writer and editor
of CashBuzz, A financial portal for the
rest of us. Check out cashbuzz.com
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