5 Ways to Beat Subprime Auto Loans

So you've been all over town looking for a new or used vehicle but feel that all of the dealers are over-charging you on a subprime auto loan because of your low credit rating. This can definitely be a downer to those who had a few unfortunate circumstances to lower their credit score and are now suffering for their mistakes. But while it is true that you may be subjected to higher interest rates because of your lower credit score, you don't have to fall victim to dealer ploys and schemes to stick it to you every chance they get. So to help make your financing experience more pleasant, let's look more closely at the subprime auto loan then review five ways to help you beat their system.

What is a Subprime Auto Loan?

Subprime auto loans are - simply put - loans designed for people who have credit scores lower than 620. Unfortunately, dropping below 620 in many creditors' eyes is considered having bad credit, which means they believe you're at risk of not fulfilling any financial agreement they enter with you. Because they view you as this "flight risk," you are likely to be subjected to higher interest rates than those with scores higher than 620. And of course, with higher interest rates comes higher car note payments - any car owner's worst nightmare.

But having high interest rates is not all you have to worry about with subprime auto loans. Unfortunately, because many auto dealers believe that the consumer with a low credit score is not as intelligent as one with a higher score, they may try to sneak in misleading clauses, penalties, and other underhanded schemes to get you to pay way more than you should for a vehicle. The good news is you ARE an intelligent individual. In fact, you are brilliant. And because you are so smart, you don't have to settle for paying more for the car than what is owed. So below, we will look at five tips you can follow to let the dealer know just who you are - and that your desperation to buy a car will not result in you settling for any punishment they decide to dish out because you have bad credit.

Beating the System

Below are five ways to stop yourself from being the victim of the subprime auto loan. Let's take a look:

Know your Credit Score - Unfortunately, many people do not know their own credit scores from the three bureaus (Equifax, Transunion, and Experian) before they walk into a dealership. However, being armed with this information can make or break the entire process. Why? Because the dealer can tell you any score they want as probable cause to raise your interest rates. But with a little added research about what your score means in reference to interest rates, you can negotiate these rates with the dealer. In other words, the more informed you are about their end of the process, the least likely they will be able to run a scam.

Watch for Prepayment Penalties - When deciding to take out a subprime auto loan, you'll find that dealers like to stick you with a multitude of penalties, one being the prepayment penalty. This simply means that to make you pay for being a flight risk, the dealership actually charges you a penalty for paying off your car early. Think about it; if you pay the entire balance of your loan over the 3, 5 or 7-year period, the higher the interest rates you were paying will have resulted in them receiving thousands of extra dollars over the sticker price. So if you pay the balance off early - minus the interest - they can't benefit from your bad credit. It is for this reason that many dealers charge up to $2,000 in penalties for paying the vehicle off early. This way, they'll feel that they got something out of the deal.

Take Out Your Own Subprime Auto Loan - While taking out any subprime auto loan is strongly discouraged, if you feel that you must, it is a good idea to take out your own. By this I mean to bypass the auto dealer altogether and go with a financial institution in the business of only loaning money - not selling cars. Companies like Capital One, JP Morgan Chase, and Bank of America are known for offering their own loans, and often they offer lower interest rates than you would receive at the dealership. If they approve you for the loan, you simply take one of their blank checks to the dealership and purchase the car in cash, eliminating the dealer's incentive to cheat you with added costs. And if you don't like the price the dealer is quoting, you can take your check to the next dealership and work your magic to strike up a better deal.

Refinance as Soon as You Can - If you've already felt forced to take out a subprime auto loan but now have improved your financial situation (better credit score, new job) and now want to know how you can lower your interest rates, one way is to refinance with one of the outside financial institutions mentioned above. Many of these companies offer refinancing programs at great rates that allow you to take out a loan for the full amount of your remaining balance (penalties included). With this loan, you can pay off the balance on your car, relinquishing your obligation to the dealership. Upon your newly found freedom, you can concentrate on paying back your loan (most likely with lower interest rates) to the financial institution.

Don't Relinquish Your Personal Power - While this may sound like a Spice Girls "Girl Power" anthem, it's really not (because it applies to both genders). It is important to always remember that you are not under the control of any dealer when purchasing a vehicle. One may tell you that no one else will finance you with your credit, but you won't know how true this is until you find out for yourself. So if you feel unhappy with the contract the dealer wants you to sign, just get up and walk away knowing you will find a true and fair deal in the near future.

Though you may feel that you are destined to settle with a subprime auto loan that comes with unfair interest rates and penalties, as you see this is not a truth you have to claim. So take these tips with you the next time you engage in a car search. You may find that by exercising your confidence and intelligence, you'll get a deal for your vehicle that even your friends with good credit will envy.