What is Subprime Auto Loan
A subprime auto loan is 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 usually, the borrower’s credit rating has to fall below a score of 620 to be considered subprime. 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. The term "subprime" was popularized by the media during the subprime mortgage crisis or "credit crunch" of 2007.
In general, it is best to shop around for rates if forced to go with a subprime loan. Not all lenders use the same criteria and some charge larger fees than others. The interest rates can be quite steep compared to a standard car loan because the lender wants to ensure it can recoup costs should the borrower default on the payments.
Alternatively, a borrower might try to improve their financial situation before they try to get financing for an automobile purchase. That way, they could qualify for a loan with much better terms.
Here are typical interest rates one can expect when shopping for an auto loan to buy a new or used vehicle:
Nonprime: 6.75 percent
Subprime: 11 percent
Deep Subprime: 13.75 percent
Nonprime: 10 percent
Subprime: 16.25 percent
Deep Subprime: 19.25 percent
Information Subprime Auto Loan Lenders Will Need
A lender may ask to see pay stubs or W-2 or 1099 forms to prove income. If a borrower is in a line of work in which it's hard to prove income — if you're a restaurant server who has a lot of income in cash tips, for example — they may need to bring in bank statements that indicate a history of consistent cash deposits to your account. Some lenders will accept bank statements in place of, or in addition to, standard pay stubs.