Much in the same way that unscrupulous mortgage brokers targeted the less financially savvy and less well offwith more expensive subprime mortgages, used car brokers are now doing the same thing. Subprime auto loans are marketed to those with less than perfect credit or no credit history, who may least be able to afford these kinds of loans.

SUBPRIME AUTO LOANS, WHY YOU SHOULD AVOID THEM?

Subprime auto loans may come larded with fees and penalties that can tack on even more to an already interest heavy loan. Fees for paying off early, late charges, fees for not enrolling in the automatic debit payment plan, you name it, and they can stick it to you. In some cases, the loans advertising the lowest monthly payments for an eight-year repayment term can end up with the buyer paying twice as much as the car is worth. Even more troubling, the rate of so-called “deep subprime” loans is growing faster than other sections of the auto buyers’ market as delinquencies past 60 days begin to rise. Not all subprime lenders are unethical, but you need to think about what they’re offering versus what you’re going to be getting.

Let’s start with a 2011 Toyota Corolla that’s over on Lipton Toyota’s lot. The red Corolla sedan has a bit of 37,000 miles. The sticker price after discount is listed as $9,911 before fees. That’s not a bad price, and it’s a dealer certified used vehicle. Now, going over to another dealer that I am not going to link, I can find a 2011 of the same model, but it has 86,000 miles and is priced $2,000 higher. The dealer offers to approve anyone, regardless of credit with a minimum down payment. A typical down payment on a used car is 15 percent with or without a trade-in, with the rest financed.

Most first time car buyers don’t know how to negotiate, how much their insurance will be, or that there are other sees in that purchase. You, as an inexperienced buyer, could end up with a ten year old car worth $2,000 that you’ve paid $15,000 for over the term of your five year loan. Just as with mortgages, it’s best to have that preapproval in your pocket. It gives you an upper hand in negotiations, and it keeps you free of having to depend on the dealer’s financing.

If you are already trapped in an exploitative auto loan, there are still some options to consider. You may be able to refinance at a better rate and shorter term. If you are in over your head, sinking fast, and thinking about bankruptcy, the bad news is that you will either have to reaffirm the loan, return, or redeem the car. Redemption may be a good option where you give the dealer a lump sum for the car’s current fair market value. If you are having problems with your loan or with your finances and keeping up with your payments, schedule a free consultation, and let’s get you out of the financial jam – and back into the traffic jam.