Whether or not you drive a luxury car, simply having a set of wheels doesn't have to be an extravagance. Gone are the days when you needed to light your Cuban cigars with your disposable income to be able to afford a car. As owning a vehicle has become something of a necessity for many adults, dealers and lenders provide a variety of options for lower-income buyers to drive away with a car of their own.
Many dealers boast their willingness to finance to shoppers with poor credit. Loans can give low-income buyers the chance to own a car when they otherwise couldn't. However, there are a few important things to keep in mind when financing on the lower end of the credit spectrum to ensure you don't get burned.
What is subprime?
Loans that are offered to those with poor credit scores are referred to as "subprime" – a term The New York Times defined as a loan given to anyone with a credit score below 640. While the specifics of credit ratings and what affects them can be opaque and complicated, an important point is that such loans have increased by 130 percent in recent years, according to the Times. In fact, Auto Credit Express reported that subprime loans are more common now than they have been since the Great Recession began in 2008.
On the surface, the increase in such lending patterns seems to be beneficial for buyer and seller alike. Lower-income or lower-credit buyers have more opportunities to own a car, while lenders appreciate the increased interest involved with lending money to more people, and at higher interest rates.
What to be wary of
Subprime loans can be good resources for some who otherwise wouldn't be able to afford a car. However, there are risks involved, and these should be considered carefully before you decide to sign any loan documents.
When buyers have lower credit ratings, such agreements represent risk for the dealer, so expect lenders to require a larger down payment. As part of the risk management process, Auto Credit Express noted that lenders may be more selective in their approvals for subprime lending, so it's still a good idea to take specific effort to raise your credit score before heading to the lot. Even if a lender is willing to approve you for a subprime loan, be sure your income is stable before you sign on the dotted line – defaulting on a loan can result in your car being repossessed.
When shopping for a used car, head to NJ State Auto Auction. There are hundreds of Carfax-certified autos on the lot, and an in-house finance team ready to help make your pre-owned vehicle affordable.