This auto loan tactic is leaving American borrowers deep in troubling debt — here’s how to spot and avoid it
In 2017, Jessica Patterson borrowed $14,786.07 to purchase a Kia Rio. But locked in at an exorbitant 25.17% interest rate, the $402 monthly payment was more than 25% of her take-home pay.
But Patterson didn't have many options. A single mother, she needed a car to hold down a job and get her kids to medical appointments. “My whole life depended on it,” she told Scripps News.
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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.
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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.
A better bet may be to look at your credit score. If you have a FICO Score below 670, you’re at risk of getting stuck with a subprime loan, says Experian.
Alternatives to subprime auto loans
A subprime auto loan could cost you more than expected in interest and put you at risk of missing payments and wrecking your credit. So it’s a good idea to try to avoid a subprime loan if you can.
One option is to hold off on buying a car and work to improve your credit score, which you can do by paying debts on time and reducing credit card balances. But if you need a car immediately like Patterson did, that may not be an option.
In that case, one tactic that might work is getting someone with better credit to cosign an auto loan for you. That could help you qualify for a better rate.
Otherwise, you can try negotiating your subprime rate down with your lender. If they want your business, there may be some wiggle room.
And remember, you’re not necessarily stuck with a subprime loan until your car is paid off. If your credit score improves, you can try to refinance your auto loan. If you’re able to qualify for a lower interest rate, it should result in lower, more manageable monthly payments.
And that, in turn, could help you stay current on your car payments, which should only benefit your credit score even more.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
