Subprime Auto Lending

Subprime auto lending has been around for many years. This is not a new concept. Let us take a look to see what this is all about.

Subprime auto lending is lending money to a borrower with questionable credit. These individuals have a higher risk of defaulting on a loan so many banks will not deal with them. However, most people need a car so the subprime auto lending market has become huge. There are many programs available. We will investigate the good, the bad, and the down right ugly parts of subprime auto lending.

When a person misses a payment on a loan, defaults on a loan, or has an account go into collections, a negative report is made on their credit report. This in turn effects their credit score, which is usually a FICO, score but not all lenders use FICO. If your score is 680 or below, you are considered as a high-risk borrower. The lower the score the higher your chance of defaulting on a loan. This means that even collateral based loans like a car loan can be hard to get through normal channels. This is where the subprime auto lender comes in. These companies operate solely by lending to individuals who are subprime borrowers.

What types of car loans are available through subprime auto lending? There are many. The usual is a 60-month term loan with a very high interest rate. Many places advertise, "With $99 and a job you can own a car", sure at upwards of 18% APR they will loan to almost anyone! This is why some people are paying $400 a month over 60 months for a car that was sold to them for $16,000.00. Do the math; $400 for 60 months is $24,000.00. quite a bit more than the initial selling price.

There are the loans you see advertised on used car lots, buy here, finance here, no credit check! That's right they don't care what your FICO score is. All that concerns them is if you have a job and an address. They sell you a car that is several years old and you make weekly, bi-monthly or monthly payments depending on when your company pays you. Miss a payment and they repossess the car immediately.

These cars are circulated around and all of the local towing companies know them because they are constantly repossessed. The reason that these lenders do not care about your credit score is that the automobile has been pad for several times over. They purchase these cars inexpensively at auction, sell them to high-risk buyers who finance with them at extremely high interest rates and when the buyer defaults, they repossess the car and start all over again. These loans should be avoided at all costs.

The cars have no warranty on them and many times these companies do not report to the credit bureaus. Therefore, this type of loan will not help you reestablish your credit. There interest rates are high and they are not well regulated. If at all possible, avoid this trap. See about other financing arrangements if at all possible.

So this is how the subprime auto lending world works. If you are a subprime borrower, don't panic. Talk to several different companies and see where you can get the best deal possible.