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Subprime Auto Loans, Explained

Subprime Auto Loans, Explained
Austin Kilham
Austin KilhamUpdated July 22, 2022
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
If you have imperfect credit or a limited credit history and need to finance an automobile purchase, you may qualify for a subprime auto loan. These loans are relatively risky for lenders to take on, so they may carry less favorable interest rates, and lenders may require you to provide additional information about your finances. Here’s a close look at what subprime loans are, how they work, and the potential risks of accepting one. 

What Are Subprime Auto Loans?

The definition of a subprime auto loan is a loan given to borrowers with poor credit, or those who have no or limited credit history. A borrower’s credit is largely represented by their credit score; a three-digit number ranging from 300 to 850. Higher scores represent good credit, while lower scores represent poor credit. There is no one definition of a subprime score. For example, the Consumer Financial Protection Bureau defines subprime as credit scores between 580 to 619. On the other hand, Experian, one of the three major credit reporting bureaus, defines subprime scores as running between 501 to 600. As a general rule of thumb, borrowers with scores less than 650 are less likely to qualify for traditional auto loan financings that those with higher scores can access. However, due to subprime loans, you can still qualify for a car loan with a 650 credit score. 

How Do Subprime Auto Loans Work?

Lenders see borrowers with low credit as at risk for defaulting on their loans. As a result, subprime loans are a risky move for creditors. To help offset some of this risk, subprime loans often carry higher interest rates than traditional auto loans, and in some cases, additional fees. Subprime lenders may ask to see additional documentation to help establish your financial stability. For example, they may ask to see bank statements, pay stubs, and tax forms before they’ll approve your loans. 

How Does Credit Score Affect Subprime Auto Loans?

The three major credit reporting bureaus—TransUnion, Equifax, and Experian—collect information about your payment history from your creditors into your credit report. Your credit score is important; it is a synthesis of this information in a single number. If you have a long history of working with creditors and paying your bills on time, you will likely have a higher credit score. If you are prone to making late payments, missing payments, or you’ve defaulted on a loan, you likely have a lower score. The Fair Isaacs Corporation (FICO), is one of the companies that produces credit scores. It rates credit scores according to the following: 
  • Poor: Scores less than 580
  • Fair: 580 to 669 
  • Good: 670 to 739
  • Very Good: 740 to 799
  • Exceptional: 800 and higher  
The higher your credit score, the more likely you are to qualify for new credit with favorable terms and lower interest rates. The lower you score, the harder it will be for you to secure new credit. Recommended: What Is a Good Credit Score?

What Is the Maximum Loan Amount I Can Get With a Subprime Auto Loan?

Subprime lenders may have a more rigorous approval process. However, that doesn’t mean that they’ll have maximum loan limits. In fact, the amount that a lender is willing to loan you is at their discretion and will depend on your personal financial situation, your creditworthiness, and the amount of risk they’re willing to take on. If you can only qualify for a subprime auto loan, it’s important to be realistic about what kind of car you want to buy. Don’t aim for the priciest vehicle you get with a subprime loan. Rather, be sure to choose one that fits your budget and for which you will be able to make on-time monthly payments. 

The Risks of Subprime Auto Loans

Before signing up for a subprime auto loan, be sure to understand the potential drawbacks.

Interest Rates

Subprime auto loans tend to carry much higher interest rates than their traditional counterparts. Consider that in 2021, average prime auto loan rates were 3.51%, while average subprime rates were 9.41%.Higher interest rates can significantly increase the amount you pay for your vehicle. Consider this: If you want to buy a $30,000 vehicle with 10% down and interest rate of 3.51% over 72 months, you’ll end up paying $2,982 in interest over the life of the loan. However, that same vehicle with a 9.41% interest rate will cost you $8,439 over the life of the loan.  

Fees

In addition, subprime loans may be subject to higher fees, including procession and origination fees, prepayment penalties, and service contracts. 

Repossession

The risk of default is higher for people with subprime loans. In fact, subprime borrowers have a 15% percent chance of becoming at least 60 days delinquent on their loan within the first three years.  If you can no longer make loan payments, your lender may repossess your car, selling it to recoup some of their losses. Default and repossession can hurt your credit score, making it more difficult to secure a loan in the future.

Examples of Subprime Auto Loan Interest Rates

Understanding the auto loan interest rates available to subprime borrowers as well as borrowers with other interest rates can help you understand how much the total cost of your vehicle will be when you're wondering when to refinance a car. It may be worth it to do what you can to improve your credit score—by paying off debts and paying bills on time—to qualify for more traditional rates.Here’s a look at 2021 average interest rates by category, according to data from  Experian. 
CategoryScore RangeAverage New Car Interest RateAverage Used Car Interest Rate
Super Prime781 – 8502.47%3.61%
Prime661 – 7803.51%5.38%
Near Prime601 – 6606.07%9.80%
Subprime501 – 6009.41%15.96%
Deep Subprime300 – 50012.53%19.87%

Refinance a Subprime Auto Loan

If a subprime auto loan is all you qualify for, know that you aren’t necessarily stuck with it forever. You may have the opportunity for a subprime auto refinance. When you refinance an auto, you replace your old loan with one—hopefully one with a lower interest rate. Look into a refinance if your credit improves and you can qualify for a lower rate, or when interest rates drop. Be sure you understand the pros and cons of refinancing. For example, While you may lower your interest rate, one disadvantage of refinancing is that fees can add to the cost of refinancing. In some cases, the cost of fees can cancel out the gain you’d receive from a lower rate. How soon can you refinance your auto loan? You can refinance almost immediately, but you may want to wait until your finance situation improves.  

The Takeaway

If you have poor credit, or you’re working on building credit for the first time, you may only qualify for a subprime auto loan. Be sure to consider the risks, and if buying a car isn’t pressing, consider doing what you can to improve your credit score before applying for an auto loan again. That way, you may qualify for lower interest rates and end up paying less over the life of the loan. If you do end up with a subprime loan, you won’t necessarily be stuck with it forever, you can always consider refinancing. Visit Lantern by SoFi to learn more and compare options for auto loan refinancing. 

Frequently Asked Questions

What is considered a subprime auto loan?
What Is the Maximum Loan Amount with a Subprime Auto Loan?
What Is the Average Subprime Auto Loan Rate?
Photo credit: iStock/skynesher
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About the Author

Austin Kilham

Austin Kilham

Austin Kilham is a writer and journalist based in Los Angeles. He focuses on personal finance, retirement, business, and health care with an eye toward helping others understand complex topics.
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