Everything You Need to Know About Subprime Auto Loans

Subprime auto loans make financing a car with bad credit a possibility, but they come with an added cost.

Holly Johnson | 

May 6, 2022 | 5 min read

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Whether you need a car to get to work or just to get around town, an auto loan can help you get behind the wheel sooner rather than later. Unfortunately, poor credit or limited credit history can threaten to stand in the way of getting the car you really want.

Yet, that doesn't have to be the case, given that subprime auto loans are geared specifically to consumers who have less-than-stellar credit. These car loans may come with added fees and considerations, but they can help you get into a car when you truly need one.

If you're ready to buy a car but worried about your credit score, your best bet is to arm yourself with information and learn all you can about available financing options. Read on to learn how subprime loans for cars work, the types of cars they can work for, and the pros and cons of this type of loan.

What Is a Subprime Auto Loan?

A subprime auto loan is a car loan designed for individuals with poor credit or limited credit, although lenders may assign a different tier of subprime loan based on a borrower's actual credit score. For example, according to Experian, the two tiers of subprime auto loans include "subprime loans" for credit scores 501 to 600 and "deep subprime loans" for credit scores 300 to 500.

These auto loan tiers are based on the FICO scoring model, which assigns credit scores that range from 300 to 850. Subprime and deep subprime loans do help people with limited credit to finance a car—but at a cost. Due to the increased risk that comes with lending to someone with bad credit or no credit, these loans usually come with higher interest rates and fees that can add up to huge sums of money over time.

What Kind of Car Can You Get With a Subprime Auto Loan?

So, how much higher are subprime auto loan rates? That depends on the type of car you're buying and whether you're a subprime or deep subprime borrower. As the Experian study notes, the average deep subprime borrower had an interest rate of 12.53% on new cars as of the fourth quarter of 2021, and the average subprime borrower paid an average rate of 9.41%. Compare that to the average rate for prime and super-prime borrowers that same quarter, which worked out to 3.51% and 2.47%, respectively.

Rates were even higher for used cars, too. In fact, Experian found the average deep subprime borrower had an interest rate of 19.87% on used cars as of the fourth quarter of 2021, and the average subprime borrower paid an average rate of 15.96%. Compare that to the average rate paid by prime and super-prime borrowers for used cars that same quarter, which worked out to 5.38% and 3.61%, respectively.

Fortunately, this goes to show that you can purchase a new car or look for a good deal on a used car as a subprime borrower. You'll just have to pay more interest on your auto loan to do so. In the meantime, you might also have to jump through a few extra hoops to get approved for the financing you need.

As a buyer who needs to get a subprime auto loan, you should know that you can apply for this type of loan in-person or online. However, many lenders that offer subprime auto loans ask for a down payment of $1,000 or 10% of the car's purchase price—although this requirement can vary. Some subprime lenders may also try to sell you a service contract for repairs or maintenance service. This contract may or may not be optional, depending on the lender.

Pros and Cons of Subprime Auto Loans

While financing a car with a low credit score may require a down payment and a little more legwork up front, subprime loans and deep subprime loans make it all possible. That said, there are some specific advantages and disadvantages of subprime auto loans you should know about.

Pros:

• Subprime loans make financing a car possible for those who might not have access to auto financing otherwise (such as individuals with poor credit or no credit score)
• Similar to other auto loans, subprime loans can come with different loan terms and monthly payment options to choose from
• You can use subprime loans for a new car or a used car based on your needs

Cons:

• The higher interest rates that subprime loans charge can cost you thousands of dollars over time
• Auto loans for subprime borrowers often come with higher fees. For example, subprime borrowers may have to pay an origination fee or a prepayment penalty if they pay their loan off early
• Some subprime loans may ask you to purchase a service contract for repairs, which piles on more costs over time
• These loans increase borrowing costs, which can stifle your borrowing power

Making Your Move

If you need to finance a car with poor credit or limited credit, an auto loan with subprime terms can help you get behind the wheel. Just remember that you'll pay more interest and higher fees if you're only eligible for a subprime loan, and these additional charges will make your car loan more costly over time.

If you're able to wait it out, taking the time to improve your credit score can help you score a better deal. You may also be able to refinance a subprime auto loan later if your credit score improves. Either way, an auto loan payment calculator can help you figure out how much your payment would be based on a loan amount, your interest rate, and the loan term.

Holly Johnson

Holly D. Johnson is an award-winning writer who covers personal finance, loan products, insurance, credit cards, loyalty programs, and travel. Due to her professional background, she has a sincere desire to educate consumers about financial products, including car loans. Johnson creates content full-time, and lives with her husband and two daughters in Central Indiana.