If you’ve been rebuilding your credit, you might be wondering what your options are for auto loans. You might have even been told that you can get a “subprime” auto loan. But what does that mean? Is it like the subprime loans recently in the news? Here’s what you need to know about subprime auto loans.
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Cuts Of Loans
First of all, lenders as a rule are concerned entirely with one thing: If they lend you money, will you pay it back? They use various tools to boil that risk down to a set of numbers, the most prominent of which is your credit score. However, while your credit score is important, it’s just the start of a process as you’re classified by the system.
Generally, lenders sort loans into one of four categories: Prime, for those with great credit; non-prime, which is average credit; subprime, those with bad credit; and deep subprime, which is either people with no credit history at all or a very poor credit rating. Those categories are generally what you’re filed into and will generally define the terms of your loan. Generally, the perspective of lenders is that the worse your credit, the higher a risk you are, and the stricter the terms will have to be. This doesn’t mean, however, that you have to take a shoddy loan.
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Proving Your Value
This risk is partially assessed with your credit score because it tends to reflect how you’ve paid back credit extended to you in the past. This is why every missed payment, late fee, and other problem you may have had in your past is reflected in your credit score. However, most people think your credit score is set in stone and defines you; neither could be less true.
First of all, you can request your credit report from the three main credit bureaus for free once a year, and you should do so every year. Inspect your credit history closely; for example, if a creditor has promised to remove something from your history and has failed to do so, you can address that. You may even come across outright errors; it’s not unknown for two people with the same name to have their credit histories get slightly mixed, for example.
Secondly, there are other ways to demonstrate that you’re a good risk. For example, if you had a tough time due to a medical situation but are finally back on track, you might be able to show in your recent history how you’ve managed to start paying your bills on time. Another method would be to put down a large down payment: 20% will both cut down on what you’re borrowing and demonstrate financial responsibility.
A Common Situation
Finally, remember that this is a common situation for many lenders. Many people have struggled as the economy has slowly recovered. You’re likely not the first person a lender has met working to secure a subprime auto loan. So don’t assume you’re on the back foot; lenders know what you’re going through and want to help. After all, in the end, the most important thing to remember is that your money has value.