
A subprime loan is a type of loan that applies to both auto loans and home loans that is typically for individuals with low credit scores or individuals with very little credit. Subprime loans carry a higher interest rate than prime loans and often come with a pre-payment penalty, so it is important to fully understand the terms of the loan before entering into any kind of agreement.
These types of auto loans became particular popular in the early 200s when subprime lending in general started to expand. Prior to their introduction, those with little credit or low credit had very few options when looking to buy a vehicle or a house. This provided them with an opportunity to work on their credit while also taking on ownership.
According to recent reports, subprime loans make up roughly 20% of all current car loans and generate an estimated $10 billion in annual revenue from interest. The average borrower has nearly $18,000 in auto debt with over 40% of people financing their vehicle. The car loan industry is a massive one for people buying both new and used vehicles.
While traditionally, car loans were under five years that has grown to six and even seven years in order to lower the monthly payment and make it more affordable for the borrower. The majority of sub prime auto leads come from auto dealer leads. That is, auto dealers contact financiers when they are trying to work with a customer that likely will not qualify for a traditional loan.
Despite the higher interest rate, they are the only option for many borrowers and not a bad one, if the borrow is confident they can make the payments on time each month. While they will be paying more in the long-run, it will help them build positive credit, so the future purchases can be prime loans.
For many the process of building good credit can feel tedious and slow moving. However, consistently making the right decisions will pay off in the long run, and having positive credit can make getting competitive loans for vehicles and houses significantly easier and more affordable.