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Subprime Auto Financing - What Consumers Need to Know About Subprime Auto Financing

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Subprime auto financing refers to loans given to high risk borrowers. High risk borrowers are those that have bad or subprime credit and/or possess other factors that make them appear risky to lenders. Subprime lenders make it possible for borrowers to obtain auto loans, without being charged astronomical interest rates.

Subprime auto financing is generally obtained through a lender that specializes in subprime loans. In most cases, a borrower must have a credit score of less than 620, to be in the subprime category. However, borrowers that frequently miss payments or have gone through a recent bankruptcy may also be placed in the subprime category. While a borrower can choose to repair their credit and obtain a traditional auto loan, situations arise where a consumer must purchase a vehicle right then. These are the instances in which borrowers should contact a subprime lender.

When shopping for subprime auto financing, it is important to shop around. While an auto dealership may offer you a loan, it will probably not be the best deal available. Most dealerships make a profit off of the loans that they provide, which means that borrowers will be forced to pay higher fees and/or be given a higher interest rate. Instead, inquire with a number of different lenders directly in order to compare deals. Additionally, potential buyers will have an easier time negotiating the price of a vehicle if they have already been approved for subprime auto financing. Since car salespeople make commission, they will be much more willing to lower the price of a car if it will result in a sale.

It is also important for potential borrowers to be realistic when obtaining subprime auto financing. It will be nearly impossible for a borrower to finance a car out of his or her price range if he or she has bad or no credit. Before speaking with a lender, create a realistic budget and determine whether the specific vehicle will be a financial burden. If the estimated payments for the vehicle will push a borrower over their budget or cause them to stretch their income too thin, they need to either save additional money for the vehicle or choose a cheaper car.

Making a large down payment will also help borrowers obtain subprime auto financing. The larger the down payment, the less of a risk a borrower is to the lender. Making a hefty down payment also proves to the lender that the borrower is serious about the loan, as they have already made a significant investment in the vehicle.

There are many advantages and disadvantages of subprime auto financing. Without this option, many consumers would not be able to purchase a car, which many borrowers with families and jobs simply cannot live without. These loans also give consumers the opportunity to repair their credit. By making payments on time, a borrower can begin to repair their credit and qualify for a traditional loan in the future.

Unfortunately, there are also some disadvantages to subprime auto loans These loans often have additional fees and higher interest rates than traditional loans. Many consumers with bad credit are not in the most secure of financial situations. Therefore, this new payment can be a huge financial burden that furthers their financial stress.

Borrowers that obtain subprime auto financing are also more likely to be heavily penalized for late or missed payments. Because subprime borrowers are seen as a high risk to lenders, lenders will be quicker to repossess their vehicle if they miss payments. Missing payments, continually making late payments, or a vehicle repossession will be extremely detrimental to a borrower’s credit. Additionally, if the car were to be repossessed, it may be impossible for a borrower to qualify for another auto loan, until they have sufficiently repaired their credit, which could leave a borrower without reliable transportation for months, or even years.

While there may be a number of possible disadvantages to subprime auto financing, these loans are generally positive. As long as a borrower makes a realistic decision as to what they can afford and shops around for the best deal, subprime lending will make it possible for borrowers to obtain a vehicle, while improving their financial situation.

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