It's not uncommon for some car shoppers to show up at a dealership, take a test drive and select the car they'd like to drive home that evening--only to find out that the last part won't happen because they can't secure financing. The biggest reason is because their credit isn't quite up to par. In this case, that equates to anything lower than a 625 FICO credit score. Which brings us to subprime auto loans. A subprime car loan is a loan that's offered for prospective buyers who have limited credit, bad credit or no credit at all.
Subprime lending is responsible for a sizeable chunk of auto financing, and that trend continues deep into 2015. But what's the current subprime landscape currently look like? Well, the short answer is that subprime auto loans are still available, but the typical subprime borrower is a little different from a decade ago.
We spoke to James Slan, Custom Finance Director at Elk Grove Dodge in Sacramento, CA who offered some perspective in terms of subprime loans and the buyers who make up the category.
Divorce, bankruptcy and foreclosures are all things that unfortunately happen, but the important thing to remember is that it's not the end of the world. "We do everything we can not to turn these customers away, because special financing does exist specifically for them," says Slan. Moreover, their particular dealership finds that roughly 2 out of 5 of their customers fall into the subprime category.
A credit score of 625 is the norm for subprime customers. But those with scores lower than that still have an opportunity to drive home in a new or used car. "I've seen customers walk in with scores of 530 - 540, and we worked out a deal so that they could drive out with a new or used vehicle," Slan adds.
He's even closed deals for customers who have no credit. These customers are primarily first time drivers who don't necessarily have a credit history. His dealership closes between 80 - 90 subprime loans per month, cementing the fact that these customers are out there and just need the chance to work with the right dealer.
Today's subprime customer might have just gone through bankruptcy after the the recession, so they're in the midst of re-building their credit. "We have subprime customers who make $6,000 per month, but don't have the best credit scores," notes Slan. "This isn't the same subprime customer we saw in 2005 - 2006." The subprime auto loans are issued to prospective buyers who have the ability to pay them back, albeit at higher interest rates. He's seen both rates and subprime buyer interest remain steady over the last year or so.
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Being prepared is key in the subprime loan application process. Shoppers will need their current driver's license, a current utility bill and a recent pay stub. Walking into a dealership with these three items will help speed the process up.
The most important aspect for car shoppers is to set realistic expectations. If you have 530 credit score, you're probably not going to walk out with a brand-new BMW or Mercedes-Benz.
And you're not going to have the opportunity to partake in attractive 0.9% APR deals you see advertised everywhere. The bigger the down payment, the lower the interest rate. But in most cases, the subprime rate hovers right around 17.95 percent. It's important to also note that a down payment of 10 percent or around $1,000 (the bigger of the two) will be needed to help secure a subprime loan. And as in most cases, the bigger the down payment, the better the interest rate.
Customers who walk into dealerships like Elk Grove Dodge have their veritable pick of the litter when it comes new Dodge, Jeep and Chrysler vehicles.
In the the case of Elk Grove Dodge, the two hot sellers are the Chrysler 200 (pictured above) and Dodge Dart. Although the Chrysler 200 isn't quite a BMW 3-Series or Audi A4, it punches above its weight class and offers loads of standard features and upmarket styling. More often than not, one test drive is all it takes.
Chrysler 200 Sales Soar »
On the flipside, some shoppers end up driving home a re-conditioned used vehicle, which looks and drive like new. The vehicles go through a thorough re-conditioning process, with focus on freshening up the exterior, interior and drivetrain. Often times, these vehicles offer the most value since the depreciation hit for the first year or two has already taken place.
Either way, the choice exists and it's up to the shopper. The best part is that not only will they get to drive a safe and well-engineered vehicle home, but they're on their way to rebuilding their credit. It's a win-win for both dealerships and car shoppers alike, especially going into the busy Labor Day holiday weekend.
