Subprime auto finance companies serve people who want to buy a car and need to secure a loan but don’t have the ability to get funding from a more mainstream lender. They can be an asset to those who need a new ride and would otherwise be out of luck. As with subprime lenders in other areas of the economy, however, you’ll pay dearly for their services if you require them.
Paying for Your Ride
One obvious benefit of a subprime auto finance company is that it casts a wider net when it comes to its customer base. If you don’t have good credit, or you don’t have a credit history at all, a subprime auto finance company may be your only chance to get a car loan without a co-signer. If you need a car to work or to meet other critical obligations, companies catering to subprime borrowers can help keep you from losing your job and keep you maintaining your desired lifestyle.
Building Your Credit
Like any other lender, a subprime auto finance company should report your on-time payments to the credit reporting bureaus, allowing you to build or rebuild your credit. Auto loans aren’t forever, and a subprime loan can be a bridge to better terms down the road. Depending on your credit history, you may be able to refinance out of the subprime loan and into something more favorable after making a series of on-time payments over several months. A loan taken on poor terms now can help you more easily secure financing in the future, because it gives you the chance to prove your creditworthiness.
Subprime loans carry higher rates virtually everywhere, which compensates for the risk of lending money to those without a strong record of handling credit. But subprime auto finance companies can be a more costly prospect than others because the dealer generally adds a markup, which increases the rates further. Getting subprime loans through a dealer rather than on your own leaves you vulnerable to two vendors -- the lender and the dealer -- who want to profit from your desire for a car and desperation for a loan. That could force you to pay more of a premium than those with stronger credit ratings face.
Cars You Can’t Afford
Both the dealer and the subprime auto finance company have a goal of winning you as a customer, and they know you’re probably worried about how much you can afford to pay each month. They’ll probably be able to get you down to a number you can live with by extending the length of the loan. Offering a subprime loan for 72 or 84 months attracts those so focused on the affordable monthly payments that they don’t look at the annual percentage rate or loan term. Getting a subprime loan may seem affordable now, but it can leave you paying for the vehicle long after you’ve moved on and purchased a new one.
Don’t Sell Yourself Short
Just because you qualify only for subprime loans for some purchases, such as for a home, it doesn’t mean that's your only option when buying a car. Auto loans aren’t as large as home loans and are paid back much quicker. The risk to the lender is less because cars are relatively easy to repossess if you default. A subprime auto finance company can be a terrible choice if you assume that’s all you’ll qualify for and don't take the time to search for more favorable terms elsewhere.