Subprime loans can look tempting but are often a bad idea in the long run. While taking out a subprime loan can seem the best way for some buyers to get the car they need, many find themselves falling into debt and missing payments. With subprime auto loan delinquencies on the rise in recent months, understanding these loans can help you avoid financial pitfalls.
Lenders extend subprime loans to so-called subprime borrowers; typically, this means individuals with a credit score below 600. Generally, higher credit scores tell lenders this borrow will likely make payments reliably. A lower score can signal an increased risk of future delinquency.
Lenders charge higher rates for subprime loans
Lenders typically handle the existence of this risk in one of two ways. Some lenders refuse financing for applicants with low credit scores. However, in the past, simply turning away subprime applicants has caused auto sales to decline. To boost sales, some lenders instead protect themselves against the risk of delinquency by imposing substantially higher interest rates. To keep monthly payments at a realistic level, they then extend the time period of the loan. For example, a borrower with a credit score over 660 may get an average loan with a 3.6 percent rate, lasting 69 months; a subprime borrower may get an average rate of 10.4 percent and make payments for 72 months.
Is your auto loan threatening your financial stability?
High interest rates combined with longer repayment periods can increase the chances that a borrower may fall behind, triggering potential penalties and even repossession. As a result, you may find your credit score sinking even lower and making it more difficult to get good loans in the future.
If you face financial difficulties and are beginning to fall behind on car payments, getting help promptly can keep more options for relief available. A qualified debt relief attorney can assess your circumstances and advise you as to the best course of action. In addition, if you suspect your lender acted fraudulently or lied about important terms, consult your lawyer as to possible recourse.