Subprime Auto Loan: Guide & Rates

What Is a Subprime Auto Loan?

A subprime auto loan is an auto loan that's extended to someone who has a subprime credit score.

Lenders can define scoring ranges differently depending on their preferences and the type of credit score. Experian's State of the Automotive Finance Market uses the following ranges:

Source: Experian, based on VantageScore^® 4.0 credit scores

You also might see several categories grouped together when discussing industry trends. For example, the prime-plus group might include prime and super prime consumers—those with scores above 660. And subprime can sometimes refer to subprime and deep subprime consumers—scores below 601.

Learn more: What Credit Score Do I Need for an Auto Loan?

How a Subprime Auto Loan Works

Subprime auto loans don't necessarily work differently than other types of auto loans, but they do tend to have a few common characteristics. For instance, you'll usually have to make a down payment and the vehicle you buy will secure the loan. The lender will also often send the money directly to the dealership or seller, and you'll repay the loan with monthly payments.

Although they work similarly, you might find that having a lower credit scores results in:

• Fewer options: Lenders tend to focus on borrowers who are in certain credit score groups. If you have a subprime score, you might be limited to finance companies and buy here, pay here (BHPH) dealerships. Some banks and credit unions might offer you a loan, but only if your credit score is on the high end of the subprime range.
• Higher interest rates: Subprime loans tend to have higher interest rates than auto loans available to consumers with good credit scores. (They could be around three times higher than what super prime borrowers receive.) You might find options with fixed or variable rates.
• Higher fees: You might have more and higher fees when you get a subprime loan, such as application processing fees, loan origination fees and prepayment penalties.

The extra upfront expenses and higher monthly payments can make it difficult to keep up with your auto loan payments. Your vehicle could be repossessed if you miss enough payments.

Learn more: 9 Common Car Loan Terms You Should Know

Subprime Auto Loan Rates

Your credit score isn't the only factor that determines your auto loan's annual percentage rate (APR). However, Experian's data offers insight into the rate that subprime lenders might expect to receive when buying a new or used vehicle.

If you focus on monthly payments for a new vehicle purchase in isolation, you might be surprised to see that subprime borrowers pay about the same as super prime borrowers. However, they also get smaller loans on average and have longer repayment terms. So, they're likely not getting as pricey a vehicle and will almost certainly wind up paying more interest overall.

Source: Experian data as of Q2 2024; VantageScore 4.0 used

The average terms for used vehicle purchases tell a slightly different story because subprime borrowers tend to have the shortest repayment terms. However, they still tend to receive the highest interest rate on the lowest loan amount. The result is a monthly payment that's in the middle of the averages across the entire credit score spectrum.

Source: Experian data as of Q2 2024; VantageScore 4.0 used

Subprime Leasing vs. Buying

About 1 in 5 borrowers chose to lease instead of buy a used or new vehicle as of Q2 2024. However, prime and super prime consumers make up the majority of all leases (86.11%); subprime borrowers only accounted for 13.61% of leases.

Leasing a car works a bit like renting it long term, and there are pros and cons to consider.

For example, leases are often for new cars, and they tend to have lower upfront and monthly costs compared to financing the purchase of the same vehicle. You'll also be covered by a warranty, although you're still responsible for general maintenance, like oil changes.

However, you may be limited to driving a certain number of miles annually before extra fees apply. You will also have to return the vehicle when your lease ends. Although you might have the option of buying it instead, your previous payments don't count toward the purchase price.

If you decide to lease, you should still shop around and try to negotiate the terms of your lease. The lower sale price and residual value—the expected value when the lease ends—could affect your monthly payment. Decreasing these could help you save money. However, you might not have as many offers to compare or negotiating power as you would with a higher credit score.

How to Get a Subprime Auto Loan

You can get a subprime auto loan from various financial institutions. Start by checking your credit and then shop around to try to get the best offer.

1. Review Your Credit

You can check your FICO^® Score^☉ for free through Experian. Although you won't know which credit score auto lenders will use, knowing one of your scores can still be helpful.

You'll also be able to review your credit reports from your Experian account and see what factors are helping and hurting your credit the most. Most credit scoring models consider similar information from your credit reports, so addressing the factors that are hurting your credit might increase all your scores—including those used by auto lenders.

2. Explore Your Options With Several Lenders

Knowing where you can find an auto loan is important when you want to gather and compare offers.

• Banks and credit unions: Banks and credit unions sometimes work with subprime borrowers, particularly if your credit score is on the high end of the subprime range, and may offer the best rates and terms. They also might be more likely to offer you a loan if you've had a long relationship with the financial institution.
• Online lenders: You can look for offers from online lenders or use online marketplaces to gather quotes from several lenders at once.
• Dealer-arranged financing: Rather than going directly to a lender, you can work with a dealership's financing office to shop around and try to get multiple offers. Although going through the dealer might be easier, the dealer might not have access to great offers for subprime borrowers. Additionally, dealers can mark up the loan's interest rate and keep the difference.
• Buy here, pay here (BHPH) financing: BHPH dealers often issue the loans directly instead of helping you find a lender. You might qualify even if you have bad or no credit, but the loans could have very high interest rates and fees.

You don't need to limit yourself to one particular type of lender. Gathering offers from several lenders and through dealers might help you find the loan. As you gather offers, make sure you're making apples-to-apples comparisons by entering the same loan size for the same vehicle or similar vehicles.

Learn more: How to Get Approved for a Car Loan

3. Gather Several Offers

Look for lenders that offer loan prequalifications or preapprovals. These terms sometimes get used interchangeably, but loan prequalifications generally show you estimated loan offers based on your self-reported financial information. If there is a credit check, it often results in a soft credit inquiry that doesn't affect your credit scores.

Loan preapprovals may give you a more accurate estimate of your loan offers. However, you might have to share verifying documentation, such as paystubs or tax returns, and agree to a hard credit check—which might hurt your credit slightly.

In either case, the offers can help you gauge your likelihood of getting approved and your loan's estimated terms. But they aren't guaranteed. You'll still need to submit an official application before you can take out the loan.

3. Apply With the Best Lenders

Complete the application with the lenders that gave you the best prequalification or preapproval offers. You may also want to submit applications with lenders and dealers that didn't offer prequalification with soft credit inquiries.

Although each application could lead to a hard credit inquiry, credit score models allow you to shop for auto loans without doing extra damage to your credit scores. Depending on the model, all auto loan hard inquiries that happen during a 14- or 45-day window could count as a single hard inquiry for scoring purposes.

Learn more: Do Multiple Loan Inquiries Affect Your Credit Score?

4. See if You Can Improve Your Offer

Finally, see if there's anything you can do to get an even better loan from the top lenders. You might try to:

• Increase your down payment
• Get money by trading in your car or by selling it in a private-party transaction
• Have a friend or family member with good credit cosign the loan
• Choose a lower repayment term

If you're taking all these steps and still aren't sure if the loan will be manageable, you might want to rethink how much you're planning on spending. Buying a less expensive car, a used car or leasing might make more sense.

Learn more: How to Get the Best Auto Loan Rates

How to Improve Your Credit

There are also a few steps that you might be able to take to improve your credit while you're looking for a new car.

• Pay down credit card balances. You may be able to lower your revolving credit utilization rate and quickly increase your credit scores if you can pay down credit card balances or increase your cards' credit limits.
• Bring past-due accounts current. Try to bring accounts that are past due but haven't been sent to collections current. You might be able to work out an arrangement with your creditor so you don't have to pay the entire amount all at once. Or, work with a nonprofit credit counselor to bring past-due credit cards current and get on a workable payment plan.
• Pay off or settle collections. If you have collection accounts, try to pay off the debt or settle the account. Both options can help your credit scores, although paying in full may be better than settling.

Once you improve your credit score, you might be able to refinance your auto loan and replace your subprime loan with a new, lower-rate loan.

Monitor Your Credit

Having good credit can be important when you're applying for an auto loan, a credit card, a personal loan or a mortgage. It can also affect your options when renting a home, and even impact your auto insurance rates.

You can check and monitor your FICO^® Score and credit report from Experian for free. Try to take small steps to improve your credit, and you might see your scores steadily increase over time.