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A customer is shown filling out paperwork for a subprime auto loan.

Subprime Auto Loans and Credit: A Consumer Guide

Owning a vehicle has become a necessity for many consumers. Finding reliable transportation to accommodate the commute to work, leisurely activities, and all of the other items that fall in between the two categories is a priority for many. But many feel that their options are either limited or nonexistent because of a low credit score or the absence of a lengthy and established credit history. This is no fault of theirs. Credit is seldom taught in academic curriculums. As a result, there are many misconceptions regarding FICO scores and obtaining financing for an automobile. If you’re someone who has either a lack of history or a lackluster credit rating, there are options available to assist you. Among these is what’s known as a subprime auto loan. What is it? How does it work? Today we’ll be taking a closer look to find out.

What Is a Subprime Auto Loan?

To explain this as clearly as possible, we first have to delve into what the term subprime means. In order to do that, we have to take a few moments to explain how credit scores work. The most common type of credit scoring is what’s known as FICO. FICO, which stands for Fair Isaac Corporation, is the system that determines your credit score, which itself is determined by a number of significant factors. Most lenders look at your FICO score when you’re applying for a loan. Five different items calculate your score.

Keys are shown exchanging hands at a dealership.

Payment History

This is the most significant factor that determines your FICO score, as it makes up 35% of a credit evaluation. Making payments on time, whether it’s for a credit card or a utility bill, determines whether or not you’re trustworthy and financially responsible.

Amounts Owed

This is the second highest contributing factor, making up 30% of your credit rating. If you have a considerable amount of established credit accounts, this won’t necessarily give your FICO score a negative impact. However, a great deal of credit being used can be a red flag to lenders, as it usually indicates that you’re struggling to stay on top of your finances.

Credit History

While your credit history only takes up 15% of your FICO score, it’s something lenders might look closely at. Someone who has a long experience dealing with credit indicates responsibility. The lack of history might not have a sizable impact on your current FICO standing, but every little bit helps.

Credit Mix

If you’re already paying off a mortgage, have a credit card, and have a retail account somewhere, these all contribute to 10% of your FICO score and are referred to as a credit mix.

New Credit

A mistake that some people make when attempting to establish their credit history is opening up multiple accounts in a short amount of time. The new credit section makes up 10% of your FICO score. Developing a history over time can be very effective in bringing it up to a higher rating.

Credit Score Ranges

Now that we’ve establishes what establishes your credit, we now can look at the ranges of scores and how the term subprime comes into play. All of the factors that we previously mention are what go into your credit score.

A FICO score below is considered poor, indicating to lenders that you are a risky borrower. A score between 580 and 669 is fair, below average but not as big a risk as a poor score. A good score is between 670 and and 739, near or above average and demonstrating a solid history of making payments. A score between 740 and 800 is very good, and over 800 is considered exceptional.

According to Experian, a subprime borrower is one with a FICO score below 670, falling into FICO’s poor and fair ranges.

The Subprime Auto Loan Explained

Now that we’ve taken a deep dive into what establishes our credit rating, we can turn our focus to what a subprime auto loan actually is. For people who have a lack of credit history or a low score, you will probably need to provide proof of your source of income. A paycheck stub, W-2, or 1099 might be necessary to secure financing. If you’ve opted to attempt auto financing with a subprime credit score, there are a few things you should take into consideration. First of all, if you already have a vehicle, you might want to either trade it to reduce the overall amount borrowed, or offer to make a sizable down payment. This will lower your monthly payments by a signifigant amount.

While having a credit score in the subprime range will not disqualify you from obtaining a loan, you should also consider that you’ll be straddled with a higher interest rate than those who have favorable credit scores. For example, when obtaining financing for a new car, those who have credit scores above the subprime range can expect to pay 2.96 to 6.57% interest. Those who have subprime scores can expect to pay somewhere in the range of 9.75 to 12.84%. These numbers increase when obtaining financing for a used vehicle. Those with favorable credit scores can expect to pay anywhere from 3.68 to 10.33%, whereas subprime interest rates sky rocket up to the ballpark of 16.85 to 20.43%. (Source:

It should be noted that the purchase of any vehicle and obtaining financing is a process. It’s very important that you shop around for a rate that’s agreeable. Just because one location turns you down or offers you a high interest rate doesn’t mean that the next location will. Take your time and play the field. You’ll be glad you did.

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Take the Time to Consider Alternatives

As we’ve seen with the evidence presented here today, there are a lot of factors to consider when it comes to both your credit situation and obtaining an auto loan that’s not hampered with a high interest rate. There all alternatives to this situation, and it’s recommended that you take the time to consider them before applying for financing.

Credit Repair

If you’ve made some bad choices with credit in the past, you might want to consider delaying the purchase of a new vehicle until you can raise your credit score by a considerable amount. There are several agencies that can assist you in repairing damage or assist you in establishing a solid history.

Private Seller

If you’re in a position where you transportation is a necessity, you might want to consider purchasing an inexpensive vehicle from a private seller. It’s important to remember that what you’re purchasing doesn’t necessarily have to be a long-term investment. Buying an inexpensive vehicle while you work on repairing your credit can mean getting something of higher quality once you’re in a better place financially.

A Final Thought on Subprime Auto Loans

If you’ve recently had your credit evaluated and it’s in a less than desirable shape, it’s not the end of the world. You can still find a vehicle of exceptional quality, even if you assume that the current situation with your credit prohibits you from doing so. Whether you decide to wait or not is a subjective choice, as everyone’s needs and situation differ from one another. Making the right decision that benefits you is what matters most.