If you have a bad credit history, the idea of driving a new car may seem like little more than a fantasy. However, a number of lenders offer auto finance plans specifically tailored to potential car buyers with low credit ratings.
Any problems with a credit check can make it difficult to qualify for the zero percent APR offers that make some auto finance offers so tempting. But fear not, because if that’s the case for you, there are still ways to get great new car finance deals. Read on to find out more…
What is a subprime or bad credit auto loan?
Subprime loans are for those who may find it difficult to stick to a regular repayment schedule. When it comes to auto finance, there is no separate threshold where a loan is classified as “subprime”, and while there are specialist “subprime auto finance” lenders, these loans may also be offered. by traditional companies.
There are a number of reasons why a borrower may be classified as “subprime” by a finance company. A lack of credit history, large debts, bankruptcy and many other factors can all contribute to a bad credit score. Any one of these – or a combination – could be used to turn down a finance deal on a car, in which case buyers may be directed to subprime lenders.
In order to offset the risk posed by subprime borrowers, lenders typically raise interest rates. Lenders have been known to charge rates of over 40% APR, which stands in stark contrast to the zero% offers regularly offered by manufacturers.
Subprime car loans may also come with other additional charges, while some will have adjustable interest rates, meaning the interest you pay on the loan is not fixed, but varies depending on the market. . This type of agreement can become very expensive in the long run.
Either way, a subprime auto loan means that you as a buyer will most likely end up paying more during the loan period to compensate for the higher risk the lender is taking on.
What is the danger with subprime loans?
The risk of bad auto loans is twofold. It’s first with car buyers: if they’ve been sold financing that they don’t understand or can’t afford in the long term, they may not repay the loan. Late payment could lead to repossession of the car, further hurt your credit score, and could cause you to be denied financing altogether.
The second risk concerns the automobile market in general. If a major economic shock were to occur where borrowers suddenly find themselves unable to repay their loans, car manufacturers and dealerships could see their revenues plummet. Forecourts could fill with more used cars, driving down prices and damaging the auto market as a whole.
The Bank of England has previously raised concerns about the growing reliance on finance. A blog by a Bank of England economist said: “Industry’s growing reliance on PCP has made it more vulnerable to macroeconomic downturns.”
Should subprime car financing be avoided?
Not necessarily. If your credit score isn’t very high for a particular reason, but you can afford to repay the loan, there’s nothing wrong with a subprime auto loan. All of this means that you’re likely going to pay more interest and fees than a capable borrower buying from a dealership or lender with standard auto financing deals.
However, there are major pitfalls that one can easily fall into in the rush to get the keys to a new car. It is imperative that you understand all the terms and conditions of the agreement and, more importantly, that you are able to comply with them before you even consider signing along the dotted line. Never enter into a finance deal that you can’t afford to repay, and that means understanding exactly what the deal is going to cost you over its lifetime.
If your budget is limited, don’t worry because there are plenty of great new car deals to be found. Check out our list of the cheapest cars on sale.