Subprime Auto Loan

What Is a Subprime Auto Loan?

A subprime auto loan is a type of loan used to finance a car purchase that’s offered to people with low credit scores or limited credit histories. Subprime loans carry higher interest rates than comparable prime loans and may also come with prepayment penalties if the borrower chooses to pay off the loan early. However, so-called subprime borrowers may have no other avenue for purchasing an automobile, so they are often willing to pay the higher fees and rates associated with these types of loans.

Subprime auto loans became big business following the monetary expansion of 2001–2004, along with subprime mortgages and other forms of lending to higher-risk individuals or businesses. Financial institutions were so flush with money that they sought out the higher returns that could be had from charging higher interest rates to subprime borrowers.

The term “subprime” actually was popularized by the media a little later, though, during the subprime mortgage crisis or “credit crunch” of 2007 and 2008. The ranks of subprime lenders thinned out after the Great Recession, but they have been making a comeback.

How a Subprime Auto Loan Works

There is no official cutoff score for subprime (versus prime) status, but usually the borrower’s credit rating has to fall below a FICO score of 650 and above 450 to be considered subprime. (FICO scores range between 300 and 850.) In general, fewer than 20% of Americans fall below 600; 22% fall between 600 and 699, and 22% are at 800 or above, according to NerdWallet.com as of September 2019.

450 to 650

The credit score range for a subprime auto loan.

In evaluating a borrower, an auto-loan lender may ask to see pay stubs or W-2 or 1099 forms to prove income. If a borrower is in a line of work in which it’s hard to prove income — a restaurant server who has a lot of income in cash tips, for example — they may need to bring in bank statements that indicate a history of consistent cash deposits to their account. Some lenders will accept bank statements in place of, or in addition to, standard pay stubs.

In general it’s best to shop around for rates if forced to go with a subprime loan. Not all lenders use the same criteria, and some charge larger fees than others. The interest rates can be quite steep compared to a standard car loan because the lender wants to ensure it can recoup costs should the borrower default on the payments.

Alternatively, borrowers might try to improve their credit scores before they try to get financing for an automobile purchase. That way, they could qualify for a loan with much better terms.

While there is no official subprime auto loan rate, it is generally at least triple the prime loan rate and can even be as much as five times higher.

Examples of Subprime Auto Loan Rates

As there is no official subprime credit score, so there is no official subprime auto loan rate. Interest rates will vary among lenders, and, of course, depend on the type of vehicle (new vs. old) and the loan term or length. Here are typical interest rates one can expect when shopping for a 60-month auto loan to buy a new or used vehicle as of September 2019.

New-Car Loan:

Used-Car Loan:

As you can see, the rate jumps dramatically between borrowers with acceptable credit scores and those with subprime status. An auto loan calculator can provide a more detailed window into how a credit score will affect a loan's interest rate and, by extension, the monthly payment.