With the job market gaining strength recently and consumers making major purchases like homes and automobiles, credit scores are improving for some who can pay off bills and debts owed during the market collapse. But for many others who are still struggling to make ends meet, their scores are still suffering due to late payments and slow payments during hard times. Car finance has seen an uptick in subprime loans – those for consumers who have less than stellar credit but still need a ride for work to make a living to pay the debts.
Subprime loans by definition are a type of loan offered at a rate above prime to individuals who do not qualify for conventional loans. For instance, if an auto buyer has a great credit score of around 750 – 800, he or she can get financing with an interest rate of around 4% currently, depending on their bank, whether the car is new or used, and the market. However, if their number is below 700, they may qualify for a subprime loan at a higher interest rate. The good side of this car finance option is that the buyer still gets a car and is able to get to work and have a ride they can depend upon daily. The bad side is that this higher rate means they’ll be paying more but not getting any more value for the money.
Subprime loans, like conventional ones, are good in that once they are paid off the credit score improves. A loan paid off with payments being made on time and early pay offs, if possible, are always a positive financial situation and will improve a score. But the catch 22 in a way is that if a person uses this type of loan, they’re probably already struggling with their money situation, so they may likely miss payments, make late ones or go into default. So, with this in mind, subprime lending as a car finance option is like any other- it has to be paid in a timely manner and paid off in order to be a smart money decision.
The idea of having money to make money still rings true as it always has – people have to have money in order to purchase the basic necessities in order to go to work and make money. Autos, homes, clothing, food, and for some, daycare – all of these things are required for people who work for a living. And they are all growing more and more costly each year. People can rarely afford to pay cash for a house or a car- finance becomes inevitable for some, but the money still has to be there to pay off the loan. A subprime loan may not sound ideal to those who are in the know when it comes to economics and budget, but for some it’s the difference between having a dependable way to work to earn a living and support a family.