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What are Subprime Auto Loans?

Subprime auto loans are those offered to people who do not have the highest credit scores. To many lenders that means anyone with a credit score that is under 680 to 720.

How Does Subprime Auto Financing Work?

The main differences between a subprime auto loan and any other type of financing is the interest rate and the length of the loan. As a general rule, the lower your credit score the higher your interest rate will be and the shorter your loan length. If your score is near to prime, say 699, the interest rate may only be one or two points above the prime rate and you could be eligible for a 5 or 6 year note. On the other hand, if your score is closer to 520, you may have to pay 18% interest and be able to get a note for 24-48 months. The lender will need to view proof of income in the form of pay-stubs or tax returns, and they will prefer that you have at least one of year of employment in the same industry–and ideally with the same employer–under your belt. They may request credit references, and loan will be secured by the financed vehicle, meaning it will be repossessed if you don’t make your payments.  Subprime auto loans are often approved through a dealership’s “Special Finance” Department.

Finding out if Your Credit is Subprime

If you are not sure what your score is, you will have to pay to find out. There are no free resources for an accurate credit score. All of the websites offering a ”free credit score” are only offering an estimate of the score from one credit reporting agency, which is unlikely to be used when you apply for an auto loan. Your best bet is to visit annualcreditreport.com to get your free credit reports. These are available at no charge once a year as a result of the CARD Act.

With those reports in hand, check for errors and omissions. If you want an solid idea of your credit score, you can buy from the Fair Issac Corporation (FICO) here: http://www.myfico.com/Products/Products.aspx. FICO is used by most lenders when considering a loan of any type. Please keep in mind that the score you buy is a general score. Auto lenders use the FICO auto-enhanced score, which is not available to the public. The auto-enhanced score is going to be higher than the score you buy if you have had an auto loan that you paid responsibly. It will be significantly lower if you have made late payments or a repossession in the past.

Although these loans have signficantly less advantageous terms than those for people with good credit, there is a bright side:  taking out and paying off a subprime car loan is a powerful to rebuild your credit. It shows lenders that you are a responsible borrower who deserves lower rates of interest in the future.

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