What Is a Subprime Auto Loan, and Do You Need One?


Drivers needing subprime auto loans near Keene, NH, should visit Faith’s Automotive and get their questions answered by our expert finance team. Whether you’re buying your first vehicle or are a seasoned driver, chances are you’re going to finance your purchase with a car loan. If this is the case, it’s important to get the right one for your financial situation.

So where to start? Usually, with your credit score. A person’s credit score is normally one of the biggest deciding factors in the auto loan process. FICO credit scores range from 300 to 850, with 850 being a high-end credit score and 300 at the low range. Normally the average driver will be somewhere between 600 and 750. But what if you score lower or higher? What does that mean?

If you have a mid-range to high credit score, that’s great; it means you have plenty of options for securing a traditional low-interest auto loan. This means unlocking a range of rates and terms that are flexible enough to fit within your budget. But not all of us have the luxury of a stellar credit score.

For drivers unable to avoid unforeseen layoffs at work or those still dealing with the fallout of bankruptcy, your credit score might carry a few black marks. Events like bankruptcy can haunt your credit rating for up to six years, making it tough to get a loan. That doesn’t mean it’s impossible, however, and this is where subprime loans come in. Subprime loans were created for those who might not qualify for a traditional car loan because of a lower credit score rating.

When you need to get into a car that you can depend on, finding an auto dealer that will work with you and offer the option of a subprime loan is key. Don’t think that, just because you have a lower rating, you have to go without when it is possible to secure financing and get back out on the road today.

If auto loans, financing, and credit scores are keeping you up at night, no worries. We’re here to explain just what a subprime loan is as opposed to a regular car loan, to help you determine the best course of action for you. Let’s face it—not all drivers are alike, so naturally, their financial situations are as unique as they are. Working with the lender to come up with a solution for your auto loan dilemma doesn’t have to be a headache. Learn your options so you can get into a dependable car you love sooner rather than later.


A salesman is shown speaking to a couple inside of a car dealership.

What Is a Subprime Loan?


It doesn’t matter if you’re an experienced driver or a newbie; auto financing and credit scores are enough to give anyone a bit of a headache. So let’s keep this simple: what is a subprime loan? How does it differ from a regular car loan?

A subprime auto loan was created for drivers who have a lower credit score, typically between 580 and 619. A person’s credit score puts them into a lending level that assesses how risky it is to lend to them. Lending levels can range from ‘deep subprime’ (a credit score below 580) to ‘superprime,’ which sits above 720.
While there is no strict cut-off to qualify for a subprime loan, you always want to strive to get the best loan possible. If you have a higher credit score, shooting for a prime car loan makes financial sense. For the rest of us, a subprime loan can be more expensive, but if you need to get into a vehicle today, it’s worth checking out.

Subprime loans were created to help out borrowers with low or limited credit histories. These types of loans often carry a higher interest rate than traditional prime loans. Why higher rates? Because a person with low credit or a limited credit history indicates the person might be a risk, so the higher interest rate is meant to make up for differences that can occur if the person defaults on the loan. Different lenders can offer different rates on subprime loans, so it’s always good to compare rates to make sure you get the most favorable terms.

Subprime loans usually come with prepayment penalties attached to them as well. These are fees that the borrower will incur if they choose to pay off the loan early. Why do loans have these fees? They are usually put in place to encourage the borrower to pay off the loan slowly over time using the preset repayment schedule so that the lender can collect the interest. Paying off a subprime loan that is high interest means the lender misses out on additional dollars.

Who Qualifies for a Subprime Loan?


Now that we know a little bit about what a subprime loan entails, who is it made for? As we established beforehand, a person with a poor credit history would often qualify for a subprime loan. Poor credit scores can be the result of paying bills late, having a black mark like bankruptcy on your record, or defaulting on previous loans. Having a low credit score, however, doesn’t mean it’s impossible to get a loan when you need one, thanks to subprime loans.

People who have a limited credit history or don’t have a traditional job (wherein it’s hard to prove a steady income) also qualify for subprime loans. For example, those who work in hospitality may supplement their normal income with tips; those who receive tips don’t have that extra income showing up on their pay slip at the end of the week. So having bank statements that show you are consistently putting money into your account is a great way to support your W-2 or 1099 tax forms that might show a lower-than-average wage.

Because interest rates and terms can differ from lender to lender, it’s great to have your work stubs, tax forms, and bank statements on hand when talking to lenders to ensure you get the best interest rates.
A salesman is shown handing a carkey to customer.


Subprime or Traditional Auto Loan?


Let’s recap to see what works for you. If you have a less-than-perfect credit score of 580 and below, that tells lenders you are a riskier borrower, so they will typically offer a subprime loan. Drivers with an average credit score of 661 to 780 are considered ‘prime’ borrowers, while those with 601 to 660 are ‘near-prime’ borrowers. A traditional auto credit loan is given to those with higher credit scores because they show to be less of a risk, whether because of their current income or extensive past credit history.

A subprime loan comes with a higher interest rate than a traditional car loan; if the borrower defaults, the lender doesn’t take as much of a loss. Subprime loans normally come with prepayment penalties and fees that borrowers have to deal with if they choose to pay them off early. However, some lenders may have prepayment penalties for regular car loans, too, so it’s always good to read the fine print.

In the end, there’s only what’s right for you. Whether you need a car now and choose to go with a subprime loan or you choose to wait and work on your credit score to get a loan with a lower interest rate, later on, is up to you. But it’s good to know your options and know there are dealers out there that are ready to work with drivers from a variety of financial backgrounds. Talking with a trusted financial expert about whether a subprime or traditional auto loan is right for you is one of the best ways to weigh risk and reward and to make the decision that works best for your unique financial situation.

May 12, 2023
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