A Guide to Understanding Subprime Auto Loans

More than 17 million vehicles are sold in the United States each year.

While this is a solid market, many would-be buyers struggle to secure auto financing. Some people walk away without a vehicle because of their credit scores. Others take advantage of subprime auto finance options.

For some people, subprime auto loans are the only option available to them.

This guide is for those who are wondering how they can secure financing with their credit rating. Understanding this type of loan will open up more options for borrowers.

Read on to learn more.

What is Subprime Auto Finance?

A subprime auto loan is the same as a regular or "prime" auto loan. "Prime" loans are offered to those who have better credit scores. Subprime loans are offered to those who fall below a certain rating.

There is no official cut-off for prime and subprime loans. A borrower with a credit rating of 620 or less is often considered subprime.

There Are Differences in Subprime Loans

There are a few key differences between a prime and subprime car loan. One major difference is the interest rate. Subprime loans often carry higher interest rates.

This is a protection for the lender, who sees the borrower as somewhat risky. By loaning at a higher interest rate, the lender can offset losses if the borrower defaults.

Another key difference involves the terms of prepayment. Prime loans don't often carry penalties for paying the loan off. Subprime loans are more likely to penalize a borrower for paying early.

Who Needs a Subprime Car Loan?

Who benefits from subprime auto lending? Most often, it's the borrowers.

Subprime financing is the only option for many people. Those with low credit scores are prime borrowers.

A limited credit history may also affect a borrower's ability to secure a loan. Lenders offering prime loans see a lack of history as a risk. They don't know how trustworthy the borrower is, so they may not want to extend a prime loan.

These people often need the vehicle they're purchasing to get to work or school. A subprime loan can help them secure the car they need to pursue these opportunities.

Who Offers Subprime Auto Options?

People with limited credit histories or bad credit scores should look into subprime auto loans. They should always do their research and make sure they're working with a trusted lender.

Who offers subprime auto financing options? Car dealers themselves are an obvious choice. Many dealerships work with people that have limited credit histories and bad credit scores.

Auto dealers often secure their own loans from preferred subprime auto lenders. Some of these lenders may offer personal loans, while others don't.

Is Subprime the Right Choice?

For those who have been turned down for an auto loan, there is hope. Subprime auto finance is almost always an option.

Learn more by talking to a trusted lender. A new vehicle may be in the near future.

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