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.

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RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. Are subprime mortgages still available for homeowners?

    Buying homes became increasingly difficult after the housing bubble burst. Since then, subprime mortgages have been making ... Read Answer >>
  4. What are the similarities and differences between the savings and loan (S&L) crisis ...

    Learn about some of the similarities and differences between the savings and loan crisis and the subprime mortgage crisis ... Read Answer >>
  5. What role did securitization play in the U.S. subprime mortgage crisis?

    Learn how the securitization of sub-prime mortgages into asset-backed securities fueled the real estate market crash in 2 ... Read Answer >>
  6. What are the different types of subprime mortgages?

    Clarify your understanding of subprime mortgages. Learn about the different types, how they work and when they might be beneficial. Read Answer >>
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