Unfortunately, Patterson soon fell behind on payments. She qualified for an extension on her loan, which allowed her to defer a couple of payments. But there was a problem.
“That rep did not explain to me what the extension meant,” she insisted. And so that pause came at a cost to Patterson. Though it allowed her to keep her car, it added about $2,000 in interest charges to the cost of her loan.
Patterson eventually reached the point where she'd paid her lender more than the sticker price of her car and still owed money. She let her lender repossess her car and has been trying to work her way out of debt ever since.
Unfortunately, Patterson’s situation is far from unique. Subprime auto loans are dangerously common, so it’s important to try to avoid falling into a similar trap.
Why subprime loans exist
Auto lenders establish loan rates based on borrower credit scores. Borrowers with poor credit tend to have an unfavorable payment history and high levels of revolving debt, so they’re considered a bigger risk than borrowers with a strong payment history and minimal debt. To mitigate this risk, lenders impose higher borrowing rates in the course of writing loans.
But some lenders take advantage of subprime borrowers by charging rates that are truly exorbitant. And the reason borrowers accept those sky-high rates is that they have no choice.
In many cases, like Patterson, borrowers can’t function without a car, don’t have the savings to buy one in cash, and can’t qualify for a better rate than the subprime offers they’re presented with. And so they sign on the dotted line and bear the consequences.
As of the second quarter of 2024, almost 17% of auto loans were subprime, says Experian. The average new subprime loan payment during that time was $749, and the average new subprime loan amount financed was $38,045.
How to spot a subprime loan
The problem with subprime loans is that their exorbitant interest rates can lead to expensive monthly payments you might struggle to keep up with. And, like Patterson, you might end up paying more in interest than the cost of your actual vehicle.
Generally speaking, if the interest rate you’re presented with seems unusually high, it’s a sign that you’re being offered a subprime loan. Experian reports that as of the second quarter of 2024, the average subprime auto loan rate for new vehicles was 13.18%, compared to the average 6.87% prime loan rate for borrowers with good credit. But if you’re not familiar with typical interest rates, you may not realize you’re being overcharged.
