Are subprime auto loans back? It may not come as a big surprise that, with car prices rising and wages staying nearly the same, many people are not getting approved for bank car loans. Instead, many consumers who need reliable transportation are turning to loans from car dealers which are often geared towards those who would not otherwise qualify for an auto loan. Going through a dealer often means you can take advantage of the fact you do not have to shop for an auto loan, but it also means you may be paying subprime rates for the loan.
What Are Subprime Auto Loans?
Before explaining subprime auto loans, it is helpful to know what “prime rate” means. A prime rate is the interest rate at which a bank may loan money to consumers. Generally, it is considered the lowest rate at which a bank will loan money. In most cases, this rate is only available to those borrowers who have low credit utilization, easily confirmable sources of income, and top credit ratings.
Subprime rates are those interest rates that a lender charges to borrowers who have a lower credit rating or may have issues showing income, such as those who are self-employed. Subprime auto loans are typically offered by car dealerships through their own credit agencies. Keep in mind that, in most cases, these credit companies are borrowing money in order to be able to lend money. So, while they often offer auto loans to borrowers with a less than perfect credit score, even those with good credit scores might pay more.
Subprime auto loans have ballooned in the last few years due to a number of factors. First, many people have returned to the workforce after being out of work for several months since the last recession. These layoffs resulted in numerous credit issues for consumers, including late payments, missed payments, and in some cases, loan defaults. This accounts for a significant portion of credit issues for consumers. That means, now more than ever, finding an auto loan is challenging.
Car prices have also increased significantly over time. According to the New York Fed, car loans increased by $17 billion increase during the first quarter of 2019. This is a significant increase over the last several years. Unfortunately, in addition to the ballooning amount of car loans, some studies indicate auto loans are showing the steepest rate of default over other consumer debt.
Protecting Yourself from High Car Loan Rates
Potential car buyers can help protect themselves from subprime car loan rates by shopping around for car loans before they start shopping for a car. While some borrowers may be better off seeking dealer financing, others may do better at their local credit union or bank. Getting pre-approved for a car loan before shopping for a car is another option. This process allows a consumer to have a full understanding of the best loan terms for their needs, gives them greater negotiating power, and allows them to find the right car that will fit their family and their budget.
During the preapproval process, you will be asked to provide financial information the same as you would during a final loan application. Your auto loan lender will pull your credit report, verify your income, and verify your other outstanding loans. Once these steps are complete, then you will be able to request a preapproval letter that outlines the amount of loan you are eligible for, the interest rate at which the loan is offered, and the terms of the loan. Not only will this allow you to determine how much car you can purchase, but it may also give you the opportunity to negotiate a purchase price or loan terms with a dealer-associated auto loan provider.
Maintaining a good job requires a reliable method of transportation. This means more consumers will be searching for quality car loans. For some consumers, it will also mean they have to accept subprime auto loans. Since car prices continue to increase, it is possible some borrowers will have to turn to these loans in order to afford new or used vehicles.
Consumers who feel their credit history or their savings and spending history qualify them for better terms than what a subprime lender is offering would be wise to explore alternatives before they start shopping for a new car. In some instances, you may have to purchase an automobile with fewer optional features than you originally thought, or you may have to consider purchasing a used car versus a new car. Either way, finding the right car loan can be challenging.
Before shopping for a new car, make sure you carefully review your credit report for errors. The last thing you want to do is get a surprise when you apply for a car loan. Sometimes, cleaning up mistakes on your credit report can mean the difference between a prime and subprime car loan.
