According to this recent article in the LA Times, 6.3 million Americans are 90 days late on their auto loan payments. Many of these are due to subprime auto loans.
The article goes on to say, “the delinquency rate on auto loans has been steadily rising since 2011, a red flag at a time when the unemployment rate has been falling. The unemployment rate is 4.1%, the lowest level since 2000. As more and more Americans get jobs and income coming in, it should be easier for them to pay their bills. But the rise in auto loan delinquencies is a reminder that millions are still struggling to make ends meet.”
So, the question is, if more people have jobs and are making money then why are so many people struggling with their auto loans and in jeopardy of losing their vehicle?
3 words…Subprime Auto Loans!
Yep! Unfortunately, many of these 6.3 million Americans have a credit score less than a 620 which means they qualify for a subprime auto loan! This also means, minimal choice in vehicle (Auto dealers have a SPECIAL LOT for subprime borrowers) and paying at least 1/3 more for the same vehicle!
So why are subprime auto loans bad?
When you qualify for a subprime auto loan you are now subject to paying anywhere from 15% to 20% or MORE!
Let’s break it down so you can see the IMPACT of paying high interest on a Subprime Auto Loan.
According to the same article the average vehicle cost is approximately $30,000.00. In this example if you are a subprime borrower due to a below 620 credit score, here is what your payments would be based on a 5-year loan.
Now let’s look at a monthly payment for a conventional auto loan. Someone with a credit score in the mid to high 600’s.
The interest rate I’ll use is based on a recent client that after 3 months of working on their credit was able to increase their score from an approximately 580 score to a mid-600 credit score and get approved for a 3.44 interest rate (versus 20% when they applied for a loan with 580 score)
That’s a $250.00 PER MONTH SAVINGS! You’re talking about $3000.00 per year OR $15,000.00 over the life of the loan!
So, you can see how buying a car with subprime credit is NOT a wise financial decision and based on the information in this article, you are setting yourself up to be one of the 6.3 million American that will most likely end up defaulting on their car loan.
So how do I avoid subprime auto loans?
Before you start shopping for a new car, be sure to check your credit score. If your score is below a 620 then consult with a credit expert that can help you INCREASE your credit score BEFORE you purchase a vehicle.
Having a 620 or above will give you the best rates and CHOICES on the type of car that best fits your family’s needs at a more affordable monthly payment.
If you already have a subprime loan you can consult with a credit expert to see what needs to be done to increase your credit scores, so you can refinance your loan with a bank or credit union.
My experience has been that typically in about 3 to 6 months (many cases) people are able to refinance from a 20% interest rate to non-subprime auto loan saving THOUSANDS of wasted dollars on interest payments by simply applying a few credit restoration tactics.
The moral of the story is, DON’T get SUCKED into a subprime auto loan! It’s NEVER a good decision and can only lead to further financial problems! The investment you will make to fix your credit will be far less than the wasted money and financial struggle you will put yourself and your family through with a subprime auto loan.
Here is a link to information that can help you INCREASE your credit score, so you can WIN at the credit game and avoid subprime auto loans!