Should you get a new car with a Subprime Auto Loan? And what exactly is a Subprime Auto Loan? (Part 2 of 2)

This blogpost is Part 2 of 2 of our series addressing Subprime Auto Loans.

You are probably aware that if you can’t make your car payments, the lender can repossess the car.  It is then taken to auction, and sold for the best bid.  The sale of the car doesn’t get you off the hook with the lender, unless somehow the sale price equals what you owe on the loan, and most times it’s not even close.  The lender can still hold you responsible for the deficiency between what you owed on the car and what it sold for, plus the costs of picking the car up and the sale itself.  Once that sale is completed, the deficiency balance will be reported to the credit reporting agencies, and it will show up should you try to finance another vehicle.  So your effort to provide yourself with a new vehicle using a subprime loan might end up with you owing on that car and still having no vehicle in your possession.

If seems strange, but actually filing a bankruptcy could help you out in that situation.  If you don’t have the cash to pay the deficiency balance, it can be discharged in a chapter 7 bankruptcy.  Since you cannot file another case under chapter 7 for 8 years from the filing date of the first one, the future car lender will know that you’ll have to be responsible for payments and/or another deficiency balance for that length of time.  So the risk to a future lender is less than it would be without a bankruptcy, and the interest rates should reflect that lessened risk.

How can you protect yourself from subprime lenders?

1)  Be suspicious when you see ads that seem to make so easy to borrow money on a car when your credit is not the best.  They will make it sound like they’re lending all day long to people whose credit makes yours look excellent.  They’re sympathetic to your circumstances, and are all too willing to help you buy the car of your dreams.

2)  Read the paperwork on a proposed car loan very carefully before you sign.  Make sure you look for the interest rate you’re being charged.  It certainly shouldn’t be as much as 23%!  If it’s not clearly indicated on the paperwork, walk away from the deal.  You’re being taken advantage of by the lender.

3)  Before you purchase a used car, do your own research on NADA or Kelley Blue Book to see what the car is worth.

4)  Also, take the car to a trusted mechanic to check it out so that you are aware of hidden defects you might otherwise not see.

5)  You are always better off if you can purchase a car with cash rather than a loan, even if what you purchase is not what you really want.  If you make a costly mistake with a subprime loan, it will keep you even longer from owning the car of your dreams!

About Barbara Horwitz

Barbara Horwitz is an experienced bankruptcy attorney helping people get past financial difficulties. She believes in creating a relationship with clients and is dedicated to making the bankruptcy process as easy and stress-free for clients.

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