Subprime auto loans are car loans given to people with lower credit scores, and they are becoming more common in the U.S. because many Americans are struggling with rising costs.

The citizens of the U.S. are facing high prices of almost every commodity in life. Although the rate of inflation is reduced, the main problem is that prices that went up during high inflation periods never went back down. Due to this, people are still buying everything at 2021-2024 high prices.

Moreover,  the price of borrowing money is very high compared to the monthly payments. The one reason that fuels the financial pressure is that a large part of the American workforce has a very unstable income that is in the form of gig work, part-time jobs, and contract work. So all these reasons together make the financial life harder to manage.

As a result of all these highlighted issues, subprime borrowers are unable to pay their loans, resulting in the number of people who are over 60 days late having doubled since 2021. This number is worse than the past three recessions that occurred in the U.S. Currently, car repossessions are at their highest since 2008. This is a stressful situation because car payments are the last bills people skip, which means families are really under financial pressure.

Under such a situation, selling a car can be an option, but most borrowers cannot even opt for it because they owe more on the loan than the worth of the car. Economists call this a sign of economic stress.

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What Counts as a Subprime Auto Loan? 

Getting a loan is always a game of credit score. Your credit score is a number that shows how reliable you are at paying back your loans. The higher the score, the reliable you are and the easier it is to get loans at lower interest rates. The lower the credit score, the riskier you are in the eyes of the lender, so they charge you more to protect themselves.

A subprime loan is a high-interest loan because your credit score might be low, and you are a higher risk in the eyes of the lender. So they put a buffer in the form of a high interest rate.

Lenders usually categorize the credit score into four main classes:

• Prime score: It is the score between 661-780
• Non-Prime Score: People with scores 601-660 are non-prime
• Subprime Score: This is our focused category with a score between 501-600
• Deep Subprime Score: Credit score under 500 falls in this category.

So, the lower your credit score, the more expensive the rate you will get for a loan. In simple words, we can say that subprime auto loans are the loans that are given to borrowers with a credit score between 501-600 at a high interest rate, with the purpose of buying a car. A prime borrower might get a car loan at 6%, while someone with a subprime score could be charged 18% to 29% or even higher. This huge difference is what makes subprime loans so expensive and risky for many buyers.

Why Dealers Push Subprime Loans 

Dealers try to convince buyers to take car loans with very high interest rates with the sole purpose of making more money.  By doing so, they get higher markups.

To clarify the concept of markup lets discuss an example. Suppose a dealer is working with a borrower whose credit score falls between 501-600. The dealer closed the deal at 16% interest rate but the actual rate which was approved by the lender was 10%. So this difference of 6% is the profit of the dealer which is called markup. The higher the interest rate they convince the customer to accept, the bigger the markup they keep.

In addition to markup, many dealers get commissions for convincing the buyer to accept the loan at a higher rate. Some lenders even reward dealerships for sending them borrowers with lower credit scores, which encourages dealers to put the option of subprime loans in front of the loan buyer, even when better options may exist.

Subprime loans usually come with longer loan terms and higher interest rates, which makes the monthly payment look smaller even if the car is expensive. For example, instead of a 4-year loan, the dealer might stretch it to 6 or 7 years. 

Because the payment is spread out over more time, the buyer gets convinced for a bigger loan amount. This makes it easier for the dealer to sell a more expensive car, even if the buyer’s income doesn’t really support it. 

On paper, the monthly payment seems affordable, but in reality, the buyer ends up paying much more overall and may struggle later. All these reasons create a system in which dealers just for their own benefit push the buyer toward these high rate loans.

Clear Warning Signs You’re Being Placed Into a Subprime Auto Loan

There are many red flags which point out that your dealer is pushing you toward a high-interest loan. If you notice any of these, take a step back before signing.

The dealer won’t show you your real credit score

It is the most common sign, your dealer avoids telling you facts about your credit score and when you ask them to show your score they simply avoid by saying things like, “Don’t worry, you’re approved”, it usually means they want to place you in a more expensive loan.

Your interest rate suddenly becomes higher after you choose a car

Sometimes the dealer first tells you a low or normal interest rate to keep you interested. But after you choose the car, they suddenly say the interest rate is much higher. This usually means they are treating you like a “subprime” customer, even if your credit score doesn’t deserve that. They increase the rate so they can make more money from your loan in the form of markup that I explained earlier in the previous section.

Your monthly payment feels too high for the price of the car

If the car is cheap but the monthly payment is comparatively very high, it means something is wrong. It usually means the dealer has charged a very high interest rate on your loan or made the loan very long by increasing the loan term, so they can charge you more. In this way, even a low-priced car becomes expensive.

They offer loans that run 60, 72, or even 84 months

Long loans make monthly installments look smaller. But when you pay these small monthly installments for a longer period of time the cumulative cost increases way more than our thoughts.

For example, If a car costs $10,000, a normal 3-year loan might cost you $12,000 total. But an 84-month (7-year) loan might look cheap monthly because of smaller installments, but you could end up paying $16,000 or more. So, it’s a classic subprime trap.

They insist “This is the best offer you can get”

If your dealer is trying to convince you forcefully toward a particular loan by saying, “This is the best offer you can get,” and is showing you no other option. It simply means they want you to accept a more expensive loan. They don’t want you to compare prices because their offer makes them more money, not you.

They avoid answering simple APR questions

If the dealer avoids answering basic questions like “What is the interest rate?”, with the tactics like saying to you again and again that, don’t worry about it, you’re approved!, or the bank gave you the best rate, or asked you to focus on monthly installments, then it’s a clear trap and a warning sign.

It usually means the interest rate is very high, and they don’t want you to notice it because they know you might say no if you see how expensive the loan really is.

Your income is written as an estimate, not exact numbers or more than you actually earn

If the dealer writes your income as an estimate instead of exact income, it means they are guessing or increasing your income on the form to make the loan get approved.

This is risky because the bank thinks you earn more than you actually do, so they approve you for a bigger, more expensive loan. But since your real income is lower, you may end up with monthly payments you cannot afford.

Suppose you are a buyer of a loan and your actual income is $2,000 a month. The dealer writes $3,000 on the loan application to get you approved. The bank says yes to a bigger loan but your real income cannot handle the higher payment.

This is an obvious red flag that the dealer is pushing you into a subprime auto loan that is too expensive for your real financial situation.

You’re offered add-ons you never asked for

In order to make the total price of the car a bit higher, your dealer adds some additional products which you never asked for like extended warranties, car alarms, or GAP insurance. As the price of the car increases you will need more loans to buy it. 

To understand it properly, consider an example, suppose you buy a car that costs $10,000. The dealer secretly adds a warranty and GAP insurance worth $1,500. Now instead of $10,000 you need $11,500. As a result your monthly payment goes up. These add-ons make the loan more expensive for you but dealers earn extra money in form of commissions and markups.

They pressure you to sign immediately

If your dealer is forcing you to sign the deal ASAP by saying things like, “This deal won’t last long”, and try to pressurize you with fear tactics like,” if you walk away this time, you will lose this offer and the next day when you will come, the rate will increase” don’t fall; it’s a clear trap. In reality, good deals don’t disappear just because you want time to check them. 

FAQs about Subprime Auto Loans

1: What credit score puts me into subprime?

Most lenders consider a score below 600 as subprime. But some dealers may still treat people with 620–650 as subprime just to charge a higher interest rate. So even if your score isn’t very low, you should always double-check what category they put you in.

2: Can a dealer lie about my credit score?

Dealers are not allowed to lie about your credit score, but many will avoid showing it clearly. They may distract you, skip details. This is why you should always check your score yourself before going to the dealership.

3: How do I avoid predatory auto loans?

The best way is to be prepared. First, check your credit score. Then get a pre-approval from your bank or credit union so you know your real interest rate. Also compare APRs from different lenders. When you know your options and have background knowledge, it’s much harder for a dealer to trick you into an expensive loan.

4: Are long-term loans (72–84 months) bad?

Long loans make monthly installments look smaller. But when you pay these small monthly installments for a longer period of time the cumulative cost increases way more than our thoughts. For example, If a car costs $10,000, a normal 3-year loan might cost you $12,000 total. But an 84-month (7-year) loan might look cheap monthly because of smaller installments, but you could end up paying $16,000 or more. So, it’s a classic subprime trap.

5: Can I refinance a subprime auto loan?

Yes. Many people refinance their loan after 3–12 months of regular, on-time payments. If your credit score improves, you can get a lower interest rate and reduce your monthly payment.