Malcolm Rivera
Subprime auto loans are those made to borrowers with credit scores considered subprime, typically ranging from 580 to 619. Subprime auto loans carry significantly higher interest rates than non-subprime loans, as lenders perceive these borrowers as riskier. The interest rate on a subprime auto loan depends on the lender, with banks offering lower rates than finance companies and buy-here-pay-here dealerships. While subprime loans enable people with limited credit to finance a car, the higher interest rates and fees can add up to substantial sums over time. Thus, borrowers with subprime credit scores often face higher interest rates and challenges in securing auto loans, especially in the new car market.
| Characteristics | Values |
|---|---|
| Credit score range | 580-619 |
| Interest rate | Significantly higher than non-subprime loans |
| Average interest rate at banks | 10% |
| Average interest rate at finance companies and dealerships | 15-20% |
| Average deep subprime borrower interest rate (new cars, Q4 2021) | 12.53% |
| Average subprime borrower interest rate (new cars, Q4 2021) | 9.41% |
| Average prime borrower interest rate (new car, Q3 2023) | 6.88% |
| Average prime borrower interest rate (used car, Q3 2023) | 9.33% |
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What You'll Learn
Credit score and history
A good credit score is a significant factor in determining whether an individual will get a loan and the interest rate they will pay. A credit score of 580 to 619 is considered subprime, with some variation across institutions and lenders. A score in the low 600s is a commonly used cutoff between prime and subprime risk. Above this range is considered non-prime or near-prime, with higher interest rates than prime but not as high as subprime. A prime borrower has a credit score of 661 to 780, and in the third quarter of 2023, they received an average interest rate of 6.88% for a new car and 9.33% for a used car.
Subprime auto loans have higher interest rates than regular auto loans due to the increased risk of lending to a borrower with a poor credit score. Subprime borrowers also tend to default more on their loans. The average deep subprime borrower had an interest rate of 12.53% on new cars in the fourth quarter of 2021, while the average subprime borrower paid an average rate of 9.41%. In contrast, the average rate for prime and super-prime borrowers that same quarter was 3.51% and 2.47%, respectively.
It is advisable to improve your credit score before taking out a loan, as this will help you secure a better interest rate. You can also shop around for rates and compare the APR (interest rate plus any fees charged by the lender) offered by different lenders. Many lenders offer pre-qualification with a soft credit check, which gives you an idea of the rate you might qualify for without affecting your credit score. If you already have an auto loan and your rate is higher than the average for your credit score, you may be able to refinance for a lower rate.
Your credit history also affects your interest rate, so it is essential to ensure that the information in your credit report is accurate. Lenders also use industry-specific scoring on top of the basic FICO model when making auto loan decisions.
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Lender type
The average interest rates vary significantly among different lender types. For instance, banks offering subprime auto loans have average interest rates of approximately 10%, while finance companies and buy-here-pay-here dealerships charge higher rates, ranging from 15% to 20%. These lenders charge higher interest rates to compensate for the higher default risk associated with subprime borrowers.
The variation in interest rates among subprime lenders cannot be solely attributed to differences in default risk. Other factors, such as borrowers' down payments, access to information and financial sophistication, and lenders' business practices, also influence the interest rates offered. For example, a borrower at a small buy-here-pay-here lender could save a significant amount over the life of the loan by securing a lower interest rate.
It is essential for subprime borrowers to shop around and compare rates from multiple lenders. Interest rates can vary depending on the lender's criteria and fees. Some lenders may charge larger fees, including application processing fees, loan origination fees, and prepayment penalties. By exploring various options, subprime borrowers can find more favourable terms and reduce the overall cost of their auto loan.
Additionally, subprime borrowers should be aware of the potential for added costs and considerations with subprime auto loans. Lenders may require a down payment, and some may offer optional or mandatory service contracts for repairs or maintenance services. These additional expenses can increase the overall cost of the loan. Therefore, it is beneficial for borrowers to improve their credit scores before seeking financing to access more favourable loan options.
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Loan term
The loan term is the period over which the borrower agrees to repay the loan. Auto loan terms are usually between 24 and 84 months, during which the borrower makes fixed monthly payments on the loan (with interest).
The loan term is distinct from the interest rate, which is the percentage of the loan that the borrower pays back on top of the original amount. The interest rate is a critical factor in determining the overall cost of the loan.
When comparing loan offers, it is important to compare the APR (Annual Percentage Rate), which includes the interest rate plus any additional fees charged by the lender.
For auto loans, the interest rate is based on several factors, including the borrower's income, credit history, and credit score. A higher credit score generally leads to a lower interest rate, as lenders consider the borrower less risky.
Subprime auto loans are those made to borrowers with credit scores considered subprime, typically ranging from 580 to 619. These loans come with significantly higher interest rates than non-subprime loans, as lenders perceive an increased risk of default. The interest rate for subprime auto loans can vary depending on the lender, with banks offering lower rates than finance companies and buy-here-pay-here dealerships.
Borrowers with subprime credit scores can improve their chances of securing a lower interest rate by improving their credit score over time through consistent and timely payments. Additionally, making a larger down payment, finding a co-signer with better credit, or opting for a longer loan term can help reduce the monthly payment burden.
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Income
The interest rate a borrower will receive on an auto loan is based on several factors, including their income, credit history, credit score, and the length of the loan term. Lenders use these factors to gauge the risk of lending to a particular borrower, with higher-risk borrowers attracting higher interest rates.
Credit scores are one of the biggest factors in determining the interest rate a borrower will receive. Generally, the higher the credit score, the lower the interest rate. There is no official cutoff score for subprime status, but a credit score between 580 and 619 is typically considered subprime. Borrowers with subprime credit scores will generally receive higher interest rates than those with prime credit scores. For example, in the fourth quarter of 2021, the average deep subprime borrower had an interest rate of 12.53% on new cars, while the average subprime borrower paid an average rate of 9.41%. In contrast, the average rate for prime and super-prime borrowers was 3.51% and 2.47%, respectively.
Other factors that can affect the interest rate on an auto loan include the type of vehicle (new vs. used), the loan-to-value ratio, the size of the down payment, the debt-to-income ratio, and the length of the loan term. Borrowers can shop around with multiple lenders to find the best interest rate and compare rates using an auto loan calculator. Improving their credit score, making a larger down payment, or finding a co-signer with better credit can also help borrowers secure a lower interest rate.
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Default risk
Subprime auto loans are those made to borrowers with credit scores considered subprime, typically ranging from 580 to 619. These loans are considered high risk for lenders due to the increased likelihood of borrower default. As a result, subprime auto loans carry significantly higher interest rates compared to non-subprime loans.
The higher interest rates on subprime auto loans are justified by lenders as a means to recoup costs in the event of borrower default. The elevated rates also reflect the increased risk associated with lending to individuals with bad credit or no credit history. Subprime borrowers are more likely to face financial challenges that may hinder their ability to make timely payments, increasing the potential for loan delinquency or default.
The interest rate on a subprime auto loan can vary depending on the lender and the borrower's credit score. For instance, banks offering subprime auto loans tend to cater to borrowers with higher credit scores than finance companies and buy-here-pay-here dealerships. Consequently, the average interest rates at banks are approximately 10%, while rates at finance companies and dealerships can range from 15% to 20%.
The disparity in default risk does not fully account for the differences in interest rates charged by various lenders. For example, the likelihood of a subprime auto loan becoming delinquent by at least 60 days within three years is around 15% for bank borrowers. In contrast, this figure rises to between 25% and 40% for finance company and buy-here-pay-here borrowers. Despite the higher default risk among the latter group, the interest rates they charge do not solely depend on this factor.
To mitigate the risk of default, subprime auto lenders often require a substantial down payment, typically $1,000 or 10% of the car's purchase price. Additionally, borrowers may be subjected to more stringent approval processes to ensure they can manage the loan repayments.
In summary, subprime auto loans are characterised by higher interest rates due to the increased risk of borrower default. This risk is influenced by factors such as credit score, income, and credit history. Lenders employ various strategies, including higher interest rates and down payment requirements, to manage the elevated risk associated with subprime lending.
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Frequently asked questions
A subprime auto loan is a loan for people with a credit score that is considered to be subprime, which is typically a range from 580 to 619. Subprime auto loans have higher interest rates than regular auto loans due to the increased risk of the borrower defaulting.
There is no single interest rate that constitutes sub-prime lending for auto loans. The interest rate will depend on the type of car being purchased, the lender, and the borrower's credit score. For example, in the fourth quarter of 2021, the average deep subprime borrower had an interest rate of 12.53% on new cars, while the average subprime borrower paid an average rate of 9.41%. In comparison, the average rate for prime and super-prime borrowers that same quarter was 3.51% and 2.47%, respectively.
The interest rate on an auto loan is based on several factors, including the borrower's income, credit history, and credit score. Lenders use these factors to gauge the likelihood of the borrower repaying the loan.
Improving your credit score is the best way to get a lower interest rate on an auto loan. This can be done by making consistent payments on time and in full. Additionally, making a bigger down payment, finding a co-signer with better credit, or choosing a longer loan term can also help secure a lower monthly payment.
