DEFINITION of 'Subprime Auto Loan'

A type of auto loan approved for people with substandard credit scores or limited credit histories. There is no official cutoff score for prime versus subprime, but it should be noted that these loans carry higher interest rates than equivalent prime loans, and may also come with prepayment penalties if the borrower chooses to pay off the loan early.

BREAKING DOWN 'Subprime Auto Loan'

Subprime auto loans became big business following the monetary expansion of 2001-2004, along with subprime mortgages and other subprime lending. Financial institutions were so flush with money that they sought out the higher returns that could be had from charging higher interest rates to subprime borrowers.

On the plus side, subprime borrowers may have no other avenue for purchasing an automobile, so they are often willing to pay the higher fees and rates associated with these types of loans.

RELATED TERMS
  1. Subprime Loan

    A type of loan that is offered at a rate above prime to individuals ...
  2. Subprime Rates

    Interest rates charged to subprime borrowers, such as on loans ...
  3. Subprime Credit

    General term for borrowings of subprime debt, or loans made to ...
  4. Subprime

    A classification of borrowers with a tarnished or limited credit ...
  5. Subprime Lender

    A type of lender that specializes in lending to borrowers with ...
  6. Subprime Borrower

    A person who is considered a higher-than-normal credit risk. ...
Related Articles
  1. Personal Finance

    Subprime Auto Delinquency Rates on the Rise (NICK, CPSS)

    Fitch Ratings reports that delinquency rates for auto loans are nearing 2008 crisis level. What's driving the surge of default? Subprime loans, of course.
  2. Insights

    Subprime Debacle: Lenders See Rising Losses (SC)

    The delinquency rate on auto loans has increased every month since February, a sign that rising losses may be ahead
  3. Personal Finance

    Auto Loans the Next Subprime: Jamie Dimon (JPM)

    JP Morgan Chase CEO Jamie Dimon issues a prescient warning over stress in the auto loan market to investors in New York.
  4. Personal Finance

    What is a Subprime Mortgage?

    Subprime mortgages are offered to borrowers with low credit ratings, usually 600 or below.
  5. Investing

    Subprime Is Often Subpar

    Proceed with caution when considering these short-term, high-interest mortgages.
  6. Investing

    Financial Institutions: Stretched Too Thin?

    Find out how to evaluate a firm's loan portfolio to determine its financial health.
  7. Personal Finance

    How To Apply For a Personal Loan

    Learn about different avenues for applying for a personal loan, and learn valuable tips to help you get your personal loan application approved.
  8. Personal Finance

    Americans Are Borrowing More To Buy Cars - But Should They Be?

    As the economy slowly heals, credit has become easier to obtain and interest rates have gone down. But does that mean it's wise to take on a car loan right now?
  9. Managing Wealth

    When Are Personal Loans a Good Idea?

    You never want to borrow money for frivolous reasons, but these five circumstances might warrant it.
  10. Personal Finance

    Subprime Auto Loans: What Borrowers Should Know

    Are subprime auto loans a disaster waiting to happen?
RELATED FAQS
  1. How much risk is associated with subprime mortgages?

    Discover the risks associated with subprime mortgages. Find out whether taking out a subprime mortgage on your home is really ... Read Answer >>
  2. What is a subprime mortgage?

    A subprime mortgage is a type of loan granted to individuals with poor credit histories (often below 600), who, as a result ... Read Answer >>
  3. What are the pros and cons of life insurance policy loans?

    Find out the pros and cons of borrowing against your life insurance policy to help you decide if this loan type is the right ... Read Answer >>
Hot Definitions
  1. Straddle

    An options strategy in which the investor holds a position in both a call and put with the same strike price and expiration ...
  2. Trickle-Down Theory

    An economic idea which states that decreasing marginal and capital gains tax rates - especially for corporations, investors ...
  3. North American Free Trade Agreement - NAFTA

    A regulation implemented on Jan. 1, 1994, that eventually eliminated tariffs to encourage economic activity between the United ...
  4. Agency Theory

    A supposition that explains the relationship between principals and agents in business. Agency theory is concerned with resolving ...
  5. Treasury Bill - T-Bill

    A short-term debt obligation backed by the U.S. government with a maturity of less than one year. T-bills are sold in denominations ...
  6. Index

    A statistical measure of change in an economy or a securities market. In the case of financial markets, an index is a hypothetical ...
Trading Center