Should You Get a Subprime Car Loan?
Having a car is essential to many people; especially if you commute to work every day or shuttle children to and from school. But buying a car can be a daunting task—chiefly if you’ve had trouble paying off loans in the past. Sometimes it can seem like an impossible hurdle.
Fortunately, it doesn’t have to be this way. No matter your financial situation, someone else has almost certainly been there before. Subprime car loans are one way to get a vehicle if you need one, but for whatever reason don’t have outstanding credit. These are a few things to consider when determining if you should get a subprime car loan.
What Is a Subprime Car Loan?
A subprime car loan is typically not much different than any other form of debt. What distinguishes it is the terms, and who needs to use them. As the name suggests, a subprime loan isn’t going to have the best terms. Loans are granted based on the likelihood that they’ll be repaid in full.
Who Needs a Subprime Car Loan?
There are many reasons why people might need to go with a subprime car loan. It all comes down to how lenders view you in terms of reliability. If you’re thinking about applying for a car loan, you need to take a look at your credit report first. You get one free credit report every 12 months from each of the major agencies. Your credit score is going to largely determine the annual percentage rate (APR) that you get for your loan. A higher rate means that you’re going to pay more over the course of the loan. Since lenders are more confident that people with outstanding credit will pay them back, these people tend to get a lower APR.
But what’s the true distinction between a subprime and non-subprime car loan. This once again comes down to credit ratings. A car loan is typically considered to be subprime if the borrower has a credit score of 501-600, and deep subprime from 300-500. For reference, 850 is a perfect credit score. The automotive research firm Edmunds suggests that the average subprime car loan for a new car will have an APR around 11 percent, while used cars will be about 16.25 percent. It’s a good idea to keep these numbers in mind so you don’t get ripped off by a lender who’s trying to trap you into a loan you can’t really afford.
Is Getting a Subprime Car Loan Worth It?
It’s impossible to make a blanket statement about whether it’s worth it for you individually to get a subprime car loan. That depends entirely on you, and your situation. On the other hand, if your credit is beaten down—either from bankruptcy or other reasons—you might not have another option. And if you need a car on a daily basis to get to work, or any other reason, you’re going to need to take what you can get.
If you really don’t require a car for any reason beyond preference, think long and hard about the pros and cons of locking into a loan. You’re probably only able to get a subprime car loan because you’ve had issues with credit in the past. Failing to repay another loan isn’t going to help you in the short or long term. On the other hand, repaying a subprime car loan can help improve your credit. Maybe you just went through bankruptcy, and now your credit score is nowhere near where it was in the past. Successfully making payments on a subprime car loan will likely improve your credit score. And once your credit starts getting better, you might be able to refinance that loan for a better interest rate. You should talk to a few lenders to compare their rates, terms, and refinancing options.
Be Realistic with Yourself
You shouldn’t go to the dealership and try to get a sports car if you need to get a subprime loan. Paying this off will probably be difficult, as the vehicle will be more expensive, and your loan will come with a higher APR. It’s important to calculate what you’ll actually be paying. With a higher APR, you’ll often want to choose a less expensive vehicle in order to stay within your budget.
Of course, everyone wants to get the best possible interest rates on their debt. However, there are circumstances that sometimes require you to take subprime loans. These can be paid off if you correctly budget your money. And if you do successfully pay off your subprime car loan, you’ll likely be eligible for better rates in the future.