Why a Subprime Car Loan Should Be a Last Resort

Taking out a subprime car loan is something that many people are forced to do because of their credit situation. When you have bad credit, lenders want to direct you to the subprime lending industry whenever possible. As someone with bad credit, you represent a bigger risk for them and subprime lenders accommodate buyers in that situation. While it can be beneficial depending on the situation, as a general rule, subprime loans are not going to be in your best interest. Taking out a subprime car loan should be your last resort. Here a few things that you will consider about subprime auto loans and why you should stay away from them. 

High Interest Rates

The interest rates that you can get with a subprime auto loan are high. In fact, most people would say that they are very high. In some cases, you may be paying two or three times as much with a subprime auto loan as opposed to a traditional car loan. When you pay a substantially higher interest rate, it is going to hurt you in a few different ways. 

The rate will make your monthly payment higher, if the terms of the loan are fixed. When you have a high loan payment, you will find yourself struggling financially. In addition to giving you a bigger payment to work with, it will also increase the overall amount of money that the loan costs you over the life of the loan. When you consider the big picture, you will see that this does not make a lot of sense in the long term. 

Questionable Terms

One of the classic tricks of subprime lenders is to present alternative loan terms for auto loans. Instead of having a fixed interest rate and a fixed payment, they may try to get you set up on a variable rate loan. While it might seem like a good idea initially because of the low rate, over time it could potentially double your payment. Your payment could be different every month, which can make it very difficult to budget for. 

Another type of risky auto loan is the balloon loan. This is a very common type of loan that is pushed by the subprime lender. With this type of loan, you will only be paying the interest on the loan each month. While it might make your payment lower each month, it will still leave you with the full balance of the loan to pay off at the end of the term. 

Repossession

When you get a questionable loan like this, your odds of having your car repossessed are increased. Whether you have a larger payment to work with or a huge balloon payment due at the end, you may not be able to satisfy your obligations. This can lead to a repossession and a devastating affect on your credit history.