Subprime Car Loans

Photo: dancummins.com

The word subprime itself scares the shit out of people. Everybody remembers what subprime mortgage crises did to the American economy, and the economy all over the world. And now, it seems the subprime problem is coming again, this time with cars. 

A subprime auto loan is a type of loan that is approved to people with low and very low credit scores. Might sound like a dream for some, but only until they realize how screwed they are. The main differences between prime and subprime auto loans are higher interest rates and often a penalty if a borrower chooses to pay off the debt earlier.

When you take a subprime car loan, you rarely will hear the sum of all your payments due, only the monthly payment amounts. These loans are usually much longer than the usual prime loans. Some now stretch for seven or eight years, while prime loans are usually twice shorter. And, although, the monthly payments for subprime auto loans might seem to be affordable, at the end a buyer ends up paying a double or triple the price of the car, because of high interest rates and longer paying periods.

This is not everything. Cars depreciate very fast. If you want to trade in your car and get a better one, in 4 or 5 years your car will cost less then you still owe for it. Hence, you will either have to throw a pile loads of money to pay the debt and buy something nicer or, as many people would do, wait for several years more to pay off the debt while using the old car.

And here is another thing. What if I tell you, that subprime auto loans are bad for the economy?  if you are a good citizen and care about your country, you should understand that by contributing to an auto loan for a longer period of time, Americans prevent themselves from changing cars for a longer period of time. This process slows down the economy, as there are less car sales happening. It is not going to have an immediate effect on the U.S. economy exactly like subprime mortgages did not, but it will come in a five year time.