What Is a Subprime Auto Loan?

A man in the driver’s seat adjusts the rearview mirror

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A subprime auto loan is an auto loan designed for people with bad—or subprime—credit or low income.

Definition and Examples of Subprime Auto Loan

Subprime auto loans are auto loans targeting borrowers who have low income, poor credit, or no credit but who still need to borrow money to get a car.

Credit scores are perhaps the most important factor in getting approved for an auto loan. The higher your credit score, the lower your interest rate. But the lower your credit score, the higher your interest rate.

The average APR on a car loan for a new car for someone with prime credit was 3.65% to 4.68% as of the first quarter of 2020. In contrast, the average APR for someone with subprime credit was 11.92% to 14.39%. An APR on a subprime auto loan can even exceed 29%.

Subprime auto loans have significantly higher interest rates than traditional auto loans because the lender takes on a riskier borrower. In addition, the underlying asset of the loan (the car) declines in value.

Let’s compare two loans that have the same amounts, down payments, and loan terms, but different APRs: 3.65% for an example of a traditional auto loan and 14.39% for an example of a subprime auto loan. Here’s how they compare:

Loan amount Down payment Loan terms APR Monthly Payment
$25,000 $1,000 72 months 3.65% $371.67
$25,000 $1,000 72 months 14.39% $499.56

You can see that with a subprime auto loan in this case, you’d pay significantly more per month compared to a regular auto loan. In the end, the total cost for interest paid on the prime loan would be $2,760.18 versus $11,968.58 for the subprime loan.

How Subprime Auto Loans Work

The process for getting a subprime auto loan is similar to getting any other type of loan. You can typically apply online or in person at a financial institution, completing a form with your basic personal information.

When you take out an auto loan, the lender pulls your credit history to see if you’re eligible for a loan and if so, at what interest rate. Based on your credit profile, lenders can approve or deny you an auto loan. A subprime auto loan targets borrowers with subprime credit scores, or those with scores less than 619, who are denied prime loans.

A low score won’t necessarily prevent you from getting an auto loan, but your interest rate will likely far exceed what you’d pay on a regular auto loan. For some people, the result is that they spend more in total interest and have a more difficult time repaying the loan.

If you fall behind on auto loan payments, your credit score will suffer and your car can potentially get repossessed.

Fees on subprime auto loans vary by lender and are similar to what you’d potentially face with a traditional auto loan. They include:

  • An origination fee: A processing fee for taking out the loan
  • A prepayment fee: A charge for paying off your loan before the agreed loan terms

Pros and Cons of a Subprime Auto Loan

Subprime auto loans may provide financing for borrowers who can get traditional loans, but in terms of interest rates, they are also expensive. Weigh the pros and cons before deciding whether one is right for you.

  • Loans for bad credit

  • Loans for low income

  • High interest rate

  • High monthly payments

  • Chance of repossession

Pros Explained

  • Loans for bad credit: If you have bad credit or not much credit to your name, a subprime auto loan can help you get a car when you really need it.
  • Loans for low income: Similarly, if you have low income, you may find a subprime loan is your only option for financing a car.

Cons Explained

  • High interest rate: Interest rates on subprime auto loans tend to be much higher compared to regular auto loans. The more you pay in interest, the more extra money you’ll pay over the total life of the loan.
  • High monthly payments: While you might be able to get a loan, you may not be able to afford the higher monthly payments due to the exorbitant interest rates.
  • Chance of repossession: With higher interest rates and monthly fees, you could fall behind on payments. If you miss a payment, the lender can repossess your car.

Key Takeaways

  • A subprime auto loan is an auto loan specifically targeting borrowers with subprime credit, or borrowers with a credit score less than 619.
  • Subprime auto loans are similar to regular auto loans in that they have fixed terms, fees, and monthly payments. But not every lender offers subprime auto loans, which makes it more difficult for borrowers to get them.
  • The APR on a subprime auto loan is typically much higher compared to a regular auto loan.

Article Sources

  1. Experian. "What Auto Loan Rate Can You Get With Your Credit Score?" Accessed Aug. 24, 2021.

  2. Columbia Business Law Review. "Could State Usury Laws Prevent Another Subprime Bubble?" Accessed Aug. 24, 2021.