“Subprime” has become a cringeworthy word, but it shouldn’t strike fear into the hearts and minds of consumers. In reality, subprime provides a valuable service to car buyers.
Serving a Purpose
Subprime lending is a viable category that serves an ever-growing section of today’s auto market. Its association with bad credit and high interest rate car loans make people want to shy away. But, subprime provides a valuable service to people who need a vehicle that have difficulty getting financed under traditional means.
Generally, when a person’s credit score reaches 620 or lower, it’s considered subprime. This makes it difficult to find direct financing or finance things, such as vehicles, in a traditional way.
Since subprime lenders only work indirectly through dealers, a person can’t go to one to get pre-approved. Not all dealerships use these lenders so, if a potential borrower needs their help, it’s important they go to the proper dealer.
How Subprime Differs
To approve potential borrowers, subprime lenders look beyond credit scores, relying on factors such as income, residency, and employment. They check a borrower’s credit history thoroughly, assessing whether a dip in credit is habitual or situational, and have set requirements people must meet.
Though it varies by lender, typical requirements include at least a $1,500 minimum gross monthly income (from a single source), six months or more on a current job with three years of employment history, a verifiable residence (in the local area), a list of personal references, and proof of a working landline or contract cell phone in the applicant’s name. Buyers also need a valid driver's license and, once approved, proof of full-coverage insurance.
Mostly, these lenders want to know if a potential borrower has the ability to repay a loan, if they’re in a stable enough position to do so, and if they have the willingness to see their auto financing through to successful completion.
Pros and Cons to Subprime
There are pros and cons to subprime lending. When someone needs a subprime loan, the interest rate is high, but it varies based on the credit score of the applicant. Vehicles have to be 10 years old or newer with fewer than 100,000 miles on them, and the minimum loan amount is typically $5,000. The borrower also needs a down payment, but this is actually a pro, rather than a con.
The typical down payment requirement for a subprime auto loan is 10 percent of the car’s selling price or $1,000, whichever is less. The more a buyer puts into a down payment, the more money they save in interest charges over the term of the loan. Down payments also signal to a lender that the buyer is serious about successfully completing their loan.
Another plus is that a subprime loan is a wonderful tool for building credit. Each on-time payment helps build a positive payment history, which should raise credit scores and increase the chance of a borrower qualifying for a traditional loan the next time they need a car.
Finding Subprime Financing
If you’re ready to give a subprime auto loan a chance, and improve your credit while getting the vehicle you need, let CarsDirect point you in the right direction. We work with an extensive network of special finance dealerships that have subprime lending resources available. It’s simple to fill out our online auto loan request form and begin the process. Our service is free of cost and obligation, so don’t delay – get started today!