What Is a Subprime Auto Loan?

A subprime auto loan is a type of loan used to finance a car purchase offered to people with low credit scores or limited credit histories.

Subprime loans carry higher interest rates than comparable prime loans and may also come with prepayment penalties if the borrower chooses to pay off the loan early. However, so-called subprime borrowers may have no other avenue for purchasing an automobile, so they are often willing to pay the higher fees and rates associated with these types of loans.

Subprime auto loans became big business following the monetary expansion of 2001–2004, along with subprime mortgages and other forms of lending to higher-risk individuals or businesses. Financial institutions were so flush with money that they sought out the higher returns that could be had from charging higher interest rates to subprime borrowers.

The term “subprime” actually was popularized by the media a little later, though, during the subprime mortgage crisis or credit crunch of 2007 and 2008. The ranks of subprime lenders briefly thinned out after the Great Recession before making a comeback.

How a Subprime Auto Loan Works

There is no official cutoff score for subprime (vs. prime) status, but usually, the borrower has a credit score between 580 and 619 to be considered subprime. (FICO credit scores range from 300 to 850.)

In evaluating a borrower, an auto loan lender may ask to see pay stubs or W-2 or 1099 forms to prove income. If a borrower is in a line of work in which it’s hard to prove income—a restaurant server who has a lot of income in cash tips, for example—they may need to bring in bank statements that indicate a history of consistent cash deposits to their account. Some lenders will accept bank statements in place of, or in addition to, standard pay stubs.

In general, it’s best to shop around for rates if forced to go with a subprime loan. Not all lenders use the same criteria, and some charge larger fees than others. The interest rates can be quite steep compared to a standard car loan, because the lender wants to ensure it can recoup costs should the borrower default on the payments.

Alternatively, borrowers might try to improve their credit scores before they try to get financing for an automobile purchase. That way, they could qualify for a loan with much better terms.

Subprime Auto Loan Rates

As there is no official subprime credit score, there is no official subprime auto loan rate. Interest rates will vary among lenders and, of course, depend on the type of vehicle (new vs. old) and the loan term or length.

Here are typical interest rates one can expect when shopping for an auto loan to buy a new or used vehicle as of the third quarter (Q3) of 2023.

New-Car Loan:

• Super prime (781–850): 5.61%
• Prime (661–780): 6.88%
• Near prime (601–660): 9.29%
• Subprime: (501–600): 11.86%
• Deep subprime (300–500): 14.17%

Used-Car Loan:

• Super prime: 7.43%
• Prime: 9.33%
• Near prime: 13.53%
• Subprime: 18.39%
• Deep subprime: 21.18%

As you can see, the rate jumps dramatically between borrowers with acceptable credit scores and those with subprime status. An auto loan calculator can provide a more detailed window into how a credit score will affect a loan’s interest rate and, by extension, the monthly payment.

The Bottom Line

A subprime credit score is one that is considered to be poor and of high risk to a lender. Subprime loans, including auto loans, come with higher interest rates due to the risky credit profile of the borrower. Regardless of the high interest rates, subprime loans are sometimes the only options for a borrower.

It is advised that borrowers make an effort to improve their credit score or create a credit history if possible before seeking out any loan so as to pay a lower interest rate on their loan, thereby reducing the overall cost of their purchase.