Five Tips When Looking at Subprime Car Loans

A subprime auto loan refers to any type of car loan used for financing a vehicle, new or used when the borrower has a low credit score. This type of loan typically has terms that are less than ideal; if your credit score is not great, then you can find it difficult to find loan offers that don’t seem unnecessarily strict or punishing. When looking for subprime auto loans in Rockford, IL it can feel like the deck is completely stacked against you, particularly if you’re trying to handle everything on your own.

Having someone by your side who understands financing in and out and has experience finding loans and fair terms for borrowers with low scores can make things a lot easier. The reality is that having a low credit score does restrict some of your options, but it doesn’t have to mean you accept the first offer you receive or put up with awful terms that feel punitive. Let’s take a look at some important things to keep in mind while considering your options for a subprime car loan and what you can do to get the best terms possible.

Tip #1 – Read Everything Carefully

This is a piece of advice you should have in mind no matter what your credit score looks like; always read the terms and conditions of anything you sign carefully before you agree to it. With a legal agreement or contract like the paperwork you sign for an auto loan, this is particularly important because you’re going to be bound to these conditions for several years. Assuming you’re working with a good dealership or lender, they’re not going to try to sneak anything into a loan agreement, but there’s a lot of information that you need to know.

Reading the terms of a loan carefully can help you discover if you’re dealing with an unscrupulous lender and avoid being scammed or otherwise taken advantage of. You can also make sure you understand everything about the loan you’re agreeing to, including items you might not expect ahead of time. For example, subprime auto loans will often have prepayment penalties that you’ll have to pay if you try to pay off the loan early. Since these loans have high interest, it’s in the lender’s favor for you to pay it off over the full duration of the loan, so if you want to pay it early, they’ll charge you for it to maximize their profits.

Tip #2 – Understand Key Items

The above prepayment penalty is just one example of the kind of specific information you need to understand and look for when agreeing to a loan for a vehicle. In addition to this, be sure you understand the following:

• Principle – This is the amount of money you’re borrowing.
• Interest Rate – This is money beyond the principle that you pay back during the length of the loan, given as a percentage. Higher interest rates mean you pay more back, so try to get the lowest rate possible.
• Loan Term – The term is the duration of the loan and how long you’ll spend paying it back, typically given in months.

Along with these specific terms, be sure you note the details about making a late payment or repossession for a missed payment. Subprime auto loans might start the repossession process the next day after a missed payment, so it’s vital that you understand your rights and obligations if you find yourself in a situation where you need to pay a few days late. Understanding this can mean the difference between paying a penalty and finding your car gone.

Tip #3 – Improve Your Credit if Possible

This might seem like an obvious tip, but it’s worth mentioning simply because of what a huge difference it can make. Your credit score is typically the biggest factor in getting good terms for an auto loan, so if you can improve that score prior to getting a loan, then you’ll get more advantageous terms. This is easier said than done, we know, but if you can pay off a credit card or get a raise at work, then this can help improve your score before you start applying for a loan. The following are the typically-accepted credit score ranges for different credit levels:

• 720+ - Super Prime
• 660-719 – Prime
• 620-659 – Near Prime
• 580-619 – Subprime
• 579 and lower – Deep Subprime

If your credit score is right around 619, for example, then paying off a credit card bill or otherwise reducing your overall debt could help improve it enough to get into the near-prime level and find better terms on loan offers. This isn’t always possible, but it’s something to consider if you have some time before you need to get your next vehicle.

Tip #4 – Don’t Always Accept the First Loan

We know how hard it can be to find a fair loan when you have subprime credit, which can make it feel like you need to accept the first offer you actually get. If you’ve been rejected by banks and other lenders, then it’s easy to start getting a bit desperate and agree to a loan with pretty awful terms or high interest rates. This is an easy trap to fall into, and it’s important to remember that you may have more options than you realize.

This is also why it helps to have someone else by your side while trying to figure things out, like one of our financing experts here at Anderson Nissan. That second voice of reason, without an emotional investment in the situation, often helps to keep us level and guide good decision-making. While you don’t want to drag out the financing process to excess, it’s important to make sure you have the full picture and know everything available to you.

Tip #5 – Consider Banks vs. Other Lenders

Here’s something many people don’t realize: not all lenders are created equally. You’ll find very different terms for your auto loan, even a subprime auto loan, depending on where it comes from – particularly with regard to a loan from a bank compared to a dedicated finance company or a Buy Here Pay Here (BHPH) car dealership. BHPH dealers tend to focus on selling to people with low credit scores and provide financing on-site through their own company rather than involving a third-party lender. The differences between these companies can be huge.

For example, subprime auto loans from a bank have an average interest rate of about 10%, according to the Consumer Financial Protection Bureau – that’s high but not abusive. Looking at a finance company or BHPH dealership, subprime auto loans typically have interest rates of about 15-20%! That’s a huge difference, as much as double, which contributes to higher payments and much more spent on a vehicle in the long run. In fairness, someone with prime credit might only be charged 4-5% for an auto loan, but the difference between banks and other lenders is still incredible. If you already have an account at a bank or credit union, starting with them when looking for a subprime auto loan can be one of the best ways to go.

Let Us Help You Find a Loan

We can understand why it often feels like the game is rigged against people trying to find a decent subprime car loan – considering things like prepayment penalties and the high rates found at BHPH dealerships. The key to getting the best terms possible is to take your time, read and consider everything carefully, and have someone there to help you navigate all of these potentially treacherous waters. At Anderson Nissan, we can’t promise we can find you a dream loan with unbelievably low interest, but we can assure you that we’ll do everything we can to find you the best terms possible. You have options when trying to find a fair loan and compassionate people who want to help you here at Anderson Nissan.