Car Finance

Dealerships vs Regular Subprime Financing

By Mike Richards Updated: 06/14/2022 Posted: 07/13/2018

Subprime lenders mainly target borrowers with poor to bad credit and use a financial instrument referred to as “subprime financing”. While there are a number of reasons why many people find themselves in the bad credit wilderness, the biggest culprit is usually lousy past financial decisions. However, this does not mean you are not creditworthy. Subprime lenders understand that good people sometimes times go through a rough patch, in many cases for no fault of their own. However, being in the lending business, they also have to hedge their risks by charging above-normal interest rates.


Buying a car is a huge undertaking, whether you have bad or excellent credit. When you decide to look for auto financing, most of the time it’s because you don’t have funds to buy it upfront. Whatever your reasons for seeking car financing, your aim should be to secure your car loan with the lowest interest rates possible.


However, getting the cheapest auto loan will require you to do credit checks that may leave your credit score severely dented. It is always preferable to avoid a hard credit inquiry, if possible.  A hard credit inquiry involves a lender reviewing your credit rating to determine whether you qualify for financing or not. It can negatively affect your credit score and remain on your credit report for two years. Soft credit inquiries, on the other hand, do not harm your credit score.


Is It All About Credit Scores? No….

Before you can even approach an auto lender, the one thing you should be aware of is your credit score. If you have a good to excellent credit score, then you can proceed with confidence since you are likely to attract competitive interest rates from auto lenders. However, should your credit score be anywhere between mediocre and bad, you will have to brace yourself for higher-than-ordinary interest rates.


Subprime vs. Traditional Lenders

When you are looking for financing, you have two main options: approach subprime or a traditional lender. The latter relies heavily on your credit score. If your credit score is lower than 650, the chances of getting an auto loan from a traditional lender are very slim. However, if your credit score is above this threshold, your chances of securing a competitive auto loan from conventional lenders are very high.

Depending on your circumstances, you now have two options: approach a lender (traditional or subprime) directly and apply for an auto loan, or go through a dealer who arranges finance for you with a subprime lender or a conventional auto lender. However, before you approach an auto lender, either directly or indirectly through a dealership, you will need to do your due diligence. Online tools and resources exist that allow you to compare packages from various lenders and car dealers.


Seeking Auto Financing Through Dealerships or Car Auctions

The advice you get from articles on auto financing you read is never to accept dealer-arranged financing. Well, there’s much wisdom in that. However, it does not mean that every dealer-arranged funding is bad.

Let’s first look at the argument against buying a car through dealer-arranged financing. First, you are likely to pay very high-interest rates since the dealer is mainly interested in selling you the car. Second, most dealer-arranged financing contains hidden charges that are cleverly covered under “markup”. Besides, a dealer may outdo themselves in trying to get you to add extras if you decide to seek financing through them.

There are, however, instances where dealer-arranged financing may make sense. There are dealers out there who are genuinely interested in getting their customers the best financing available. You might even get extra benefits if you go for dealer-arranged financing since some dealers have a special arrangement with lenders. A dealer is in a better position to negotiate for you the best rate from a lender.

Should you have good credit, dealer-arranged financing may work very well for you. The caveat, however, about dealer-arranged financing is that you should tread carefully before you sign that agreement. Make sure you have done your research and compared prices for the best rates in town. Resist the temptation to fall for potential car salesman gimmicks such as ‘let me get you into a car today. Once you get over-excited about a car, the salesman will keep on pushing your hot buttons; and you might end up buying a car with very expensive financing.

You should be even more careful when taking dealer-arranged financing on bad credit.

If you are looking to buy a car on bad credit, the dealer already knows you have limited options. They will likely advise you to take the maximum repayment term. Those low monthly rates will compound into hefty amounts by the time your last payment is made.

If you are extremely diligent, dealer-arranged financing may work well for you, especially if your credit is good. By being aware of the potential tricks and traps that come with dealer-arranged financing, you will be in a better position to push for the best deal possible, even from dealer-arranged financing.

With bad credit, however, you will need to be extremely careful when dealing with dealership-arranged financing. Since most of the traditional lower-interest lenders may have shut the door on you, your remaining option would be to approach a subprime lender.


Seeking Car Financing Through Subprime Lenders

Subprime car loans are given to clients with less than average credit scores – typically below 650 points. As noted above, they understand the risk they are facing for taking a chance on you. Their interest rates are calculated with your risk profile in mind. This means you will end up paying more for the same car than another client with good credit.

If you are a subprime borrower looking for car finance, it’s best to approach a subprime lender directly. Don’t go to a dealership for reasons already cited above. Before approaching a dealer, first secure car financing from your favorite subprime lender. This should be the auto lender offering you the best interest rates with the lowest origination fees. Once you have this secured, the car dealer has little option but to stick to your lender. You will also have the chance to negotiate lower prices since you will be bargaining from a position of strength.

Besides the fact that subprime financing attracts high-interest rates, the down payment is also typically high, and there could be other hidden charges. Don’t allow your bad credit situation to put you on the defensive. Avoid taking the easiest regular repayments as these may end up stretching to eternity.


Beating the Bad Credit Rap

The fact that you have bad credit doesn’t mean you’re completely shut out of low-interest rates from traditional lenders.

You can beat the system by using a cosigner. Ideally a family member or a close friend.

A cosigner is someone with a good to excellent credit score who acts as your guarantor and in principle agrees to pay the loan should you default. The beauty of using a cosigner is that it’s their credit score that’s evaluated and not yours. Since their credit score is within traditional lenders’ requirements, the likelihood of your auto loan getting approved is very high. The one thing to remember, however, is the fact that you are still responsible for paying back the auto loan.

Other tricks you can use include paying the car loan within the shortest term possible. Also, pay regular lump sums to reduce the principal amount.

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