A subprime car loan is one that caters specifically to people who have bad credit or limited credit history. If you have a less than ideal credit score and you need a loan to buy a vehicle, here’s what you should know:
Who needs a subprime car loan
Your credit report is one of the main things lenders use to determine whether or not you are a subprime borrower. This report contains your financial data such as information about every loan you’ve taken in the last six years, the credit limit on each account, how much you owe, and other information. Your credit score is a numerical value that is used to represent your level of creditworthiness based on the analysis of your credit files.
In most instances, lenders consider anything less than 630 on a credit report to be a subprime territory. If you do not already know your credit score, you should obtain a credit report. In Canada, there are two national credit bureaus: TransUnion Canada and Equifax Canada. You are entitled to a free copy of your credit report from each of them, every 12 months. So, request a report from both.
Other reasons you may be classified as a subprime borrower
While you might not have outstanding debt or a history of late payments, the inability to keep a stable job might cause you to be classified as a subprime borrower, regardless of your credit score. This is so as you will need to have a steady income to make payments. When evaluating your employment for stability, most lenders will look at the last two years of your work history.
If you have acceptable credit but have filed for bankruptcy in the past, you may still need to consider a subprime car loan; especially if a car loan was part of the reason you had to file for bankruptcy. Additionally, if you have ever had a car repossessed, a subprime car loan might be your only option.
Subprime car loans can improve your credit
One of the steps you can take to fix a bad credit score is by maintaining healthy credit accounts. But how can you do that if lenders are hesitant to give you a loan because of your credit mistakes in the past? You will not likely face rejection from a subprime lender as they specialize in bad credit loans.
As with any other loan, activities on a subprime car loan are reported to credit reporting bureaus. This presents you with an opportunity to prove your creditworthiness. By consistently making on-time payments (at least the minimum amount) you can improve bad credit. This is also a great way to build credit if you have limited or no credit history.
In addition to maintaining current credit accounts, you should make an effort to clear any outstanding debt if you want to fix bad credit.
Interest rates are rarely renegotiated
Because a lender is taking a higher risk with a subprime car loan, it is a given that interest rates will be higher than if you had a prime auto loan. You might think you can renegotiate the interest rate after making regular payments for some time. Unfortunately, this is not always the case. Usually, you are only able to renegotiate your interest rate if you are refinancing to get a new vehicle.