About Real Car Tips
Profile Pic
Find the Best Car Deals Near You ⤵
GuideCar Loans

How Lenders Treat Sub-Prime Borrowers

In the world of car financing, everyone falls into two classes: Prime borrowers (Credit score of at least 620) and Sub-prime borrowers (those with credit scores below 620).

If you're in the sub-prime category, you're essentially guilty until proven innocent - meaning lenders think you're a big risk for defaulting on the loan.

To compensate them for this risk, you will be subjected to terms and conditions that make it harder to get a loan, and more expensive if you do get one.

How Prime Borrowers are Treated

If you're lucky enough to have prime credit with scores above 720, you're treated like royalty and can expect interest rates as low as 0% on new vehicles and a loan of up to 150% of the retail value of the vehicle.

This means you can throw in an extended warranty and other add-ons into the loan with no down payment.

Lenders love dealing with prime borrowers because it's practically guaranteed money with very little risk.

How Sub-Prime Borrowers are Treated

Lenders view sub-prime borrowers as a huge risk, so they're very inflexible and scrutinizing when it comes to lending money.

First of all, lenders are likely to go through your loan application with a fine-tooth comb, verifying all of the information by calling employers, references and landlords.

They will require you to produce recent pay stubs, proof of address, and even phone bills.

They will make sure you've been with the same employer and living at the same address for at least 2 years, otherwise, you're not likely to be approved for the loan.

Even if you are approved, that doesn't mean it's easy street from here on out. You will be forced to come up with a large down payment because lenders will only finance a certain percentage of the vehicle's value.

In many cases, they will only finance up to 40% of the value of the car. You'll have to come up with the difference, which means you'll either have to borrow money from friends and family, or save up for several months.

As if that's not bad enough, you will be paying interest rates in the double digits, up to 30% in some cases.

Welcome to the world of sub-prime borrowing!

If your credit score falls in the sub-prime range, you need to do everything possible to raise your score (Read: 5 Ways to Improve Your Credit Score).

If possible, you should take at least 6 months to start repairing your credit before applying for a loan.

If you're in urgent need of a vehicle and can't wait, read our guide to Getting a Car Loan with Bad Credit

3 Steps Every Car Buyer Needs to Take to Save Maximum Money

The key to getting the best deal is to gather price or lease bids from as many local dealers as possible. Then shop that best price around until no one can beat it. Here are the steps:

Step 1 Get Prices From My Trusted Network

Select the vehicle you're interested in to see if there are local dealers in my network who will provide you with their best upfront price. You will get direct access to an internet sales manager who you can further negotiate with online (no need to visit dealership).
Select Vehicle to Get Local Pricing

Step 2 Get Prices From TrueCar / CarsDirect

TrueCar, and CarsDirect are my top 2 online price quote recommendations. These services show you pre-negotiated prices from dealers closest to you - and the deals are usually pretty decent. But remember, you can still negotiate further.

Step 3 Complete my Checklist

Follow this up with my checklist to make sure you squeeze out every last bit of savings.
- Gregg Fidan

Each week, I'll keep you up-to-date on the latest car deals and news that might affect your purchase. This includes...

  • Best Rebates, Incentives, and Lease Deals
  • Latest Car Buying Scams and Tricks
  • The Best & Worst Time to Buy a Car
  • Which Cars You Should Avoid

(Absolutely NO SPAM, easy to unsubscribe)

About The Author

Gregg Fidan Gregg Fidan is the founder of RealCarTips. After being ripped off on his first car purchase, he devoted several years to figuring out the best ways to avoid scams and negotiate the best car deals. He has written hundreds of articles on the subject of car buying and taught thousands of car shoppers how to get the best deals.
Got a Question About This Article?

Your Zip Code: