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Subprime Auto Loan Risks | Auto Credit Express

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There’s always a risk in taking on new credit – including auto loans. Whether you take on a traditional car loan or work with a subprime lender, there are risks to consider before signing that dotted line.

What Is a Subprime Car Loan?

First, let’s define subprime vehicle financing.

Subprime is a term used to describe bad credit borrowers, generally defined as a borrower with a credit score below 670. It’s more of an umbrella term, encompassing loans for borrowers with tarnished credit, and the lenders that provide them. Typically, subprime lenders are third-party lenders signed up with special finance dealerships.

These lenders often assist credit-challenged borrowers who struggle to meet traditional auto loan requirements. This can include borrowers with no credit, poor credit history, bankruptcy, divorce, and other bad credit situations.

Risks Associated With Secured Car Loans

Whenever you take on new credit – whether that be a credit card or an auto loan – you’re taking on some risk.

If you agree to repay a car loan over the course of a few years, then you’re obligated to make those payments or risk default and a possible repossession. Default and repos can drastically lower your credit score, and make it harder for you to take on new credit for at least one year, in most cases.

Car loans are typically secured, meaning that the vehicle is collateral for the loan. If you break the contract, the lender typically moves forward with repossession – leaving you to pay a leftover loan balance and you’re left without a vehicle.

Subprime Auto Loan RisksAuto loans can last anywhere from four to eight years, sometimes longer. It’s a big commitment. If you were to lose your income during that time, or have other financial difficulties, it could lead to struggles with the car loan. And, possibly losing the vehicle and damaging your credit reports in the process.

Another big part of auto financing is interest charges. Interest is the cost of borrowing money, and if your credit score is in the subprime scoring range, then you may pay more in interest. For some borrowers, this could mean paying more than the car is worth. While it’s common to pay a little more than the vehicle’s value when you finance, a high interest rate could mean thousands more.

Taking on a car loan is a balancing act between affordability, vehicle value, and stability. If you believe you’re financially able to repay a car loan, and you can wrangle a good interest rate on a decently-priced vehicle, then auto financing may not be that risky for you.

Subprime Vehicle Financing Considerations

If your credit score needs some work and you’re thinking about looking into subprime financing, there are some things to know:

  • Interest rates on subprime auto loans are typically higher than traditional car loans
  • Most subprime lenders require a down payment, typically at least $1,000 or 10% of the vehicle’s selling price
  • Subprime lenders have vehicle requirements, generally requiring borrowers to choose a vehicle with under 100,000 miles and less than 10 years old
  • Subprime lenders typically can’t assist borrowers with a repossession that happened less than 12 months ago
  • Borrowers with multiple, recent delinquencies on their credit reports may not be eligible (such as a recently dismissed bankruptcy)

While a subprime car loan may require a down payment and the interest charges can be higher than traditional financing, this is typically because borrowers with poor credit seek out subprime car loans. A lower credit score is usually the culprit for a high interest rate, since auto lenders largely base your loan terms on your credit rating and individual situation.

Down payments are required with subprime car loans because cash down lowers the chance of loan default, and shows the lender you’re willing to invest in the vehicle. Down payments are beneficial to bad credit borrowers as well, since they lower the amount you need to finance, lowering your monthly car payment.

While subprime lenders require more from their borrowers, the loan is reported, and your credit score can benefit if you stay current on the payments. Once you’ve repaired your credit score over time, you may not need to seek out special financing for your next vehicle.

Always Read the Fine Print

No matter what loan agreement you’re looking to accept, you should always read the fine print. There are a few things to look for before signing a subprime car loan agreement:

  • Prepayment penalties – Prepayment penalties are uncommon now, but in some cases, lenders charge borrowers extra if they pay off their auto loan before the predetermined end date. Ask the lender or special finance manager if there are any prepayment penalties in the loan agreement.
  • Total interest charges – Lenders must disclose your interest rate and total interest charges anticipated throughout the life of the loan. Make sure the verbally agreed-upon interest rate and the rate listed in your loan documents match. If you sign it, and find out later that it’s not what was verbally agreed to, it’s too late to change it (unless you refinance the car later on).
  • Cross-reference documents – There are many documents that are involved in the car buying process, including the loan agreement and the buyer’s order. A buyer’s order is done by the dealership, so make sure the vehicle’s information, down payment amount, and everything else is consistent between the two documents. Both items are legally binding once signed by both parties.
  • Ask about deferment options – It’s not uncommon for a borrower to lose income over the course of a car loan, and it could make it difficult to stay current on payments. However, some lenders allow deferment programs that pause payments for a month or two to allow the borrower to reorient themselves to resume payments. Not all lenders offer these programs, so ask what requirements there are to qualify for them and if they’re offered by the lender at all. You never know – you may end up needing it if you run into financial difficulties in the future and it could help you avoid default and repo.

Lenders vary, and they all tend to have different terms and conditions for their auto loans. It’s always important to know what you’re signing up for when taking on a car loan, so don’t be afraid to ask questions or ask for clarification.

Ready to Find a Special Finance Dealership?

It can be tough to nail down special financing for a vehicle. Not all dealerships are signed up with subprime lenders, and not all dealers advertise what lenders they’re signed up with.

Instead of trying to locate a special finance dealership that’s signed subprime lenders all on your own, let us at Auto Credit Express find one for you. Using our nationwide network of special finance dealers, we’ll look for one in your local area at cost and with no obligation. Complete our auto loan request form to get started.

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Are Sallie Mae Student Loans Federal or Private?

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When you hear the name Sallie Mae, you probably think of student loans. There’s a good reason for that; Sallie Mae has a long history, during which time it has provided both federal and private student loans.

However, as of 2014, all of Sallie Mae’s student loans are private, and its federal loans have been sold to another servicer. Here’s what to know if you have a Sallie Mae loan or are considering taking one out.

What is Sallie Mae?

Sallie Mae is a company that currently offers private student loans. But it has taken a few forms over the years.

In 1972, Congress first created the Student Loan Marketing Association (SLMA) as a private, for-profit corporation. Congress gave SLMA, commonly called “Sallie Mae,” the status of a government-sponsored enterprise (GSE) to support the company in its mission to provide stability and liquidity to the student loan market as a warehouse for student loans.

However, in 2004, the structure and purpose of the company began to change. SLMA dissolved in late December of that year, and the SLM Corporation, or “Sallie Mae,” was formed in its place as a fully private-sector company without GSE status.

In 2014, the company underwent another big adjustment when Sallie Mae split to form Navient and Sallie Mae. Navient is a federal student loan servicer that manages existing student loan accounts. Meanwhile, Sallie Mae continues to offer private student loans and other financial products to consumers. If you took out a student loan with Sallie Mae prior to 2014, there’s a chance that it was a federal student loan under the now-defunct Federal Family Education Loan Program (FFELP).

At present, Sallie Mae owns 1.4 percent of student loans in the United States. In addition to private student loans, the bank also offers credit cards, personal loans and savings accounts to its customers, many of whom are college students.

What is the difference between private and federal student loans?

When you’re seeking financing to pay for college, you’ll have a big choice to make: federal versus private student loans. Both types of loans offer some benefits and drawbacks.

Federal student loans are educational loans that come from the U.S. government. Under the William D. Ford Federal Direct Loan Program, there are four types of federal student loans available to qualified borrowers.

With federal student loans, you typically do not need a co-signer or even a credit check. The loans also come with numerous benefits, such as the ability to adjust your repayment plan based on your income. You may also be able to pause payments with a forbearance or deferment and perhaps even qualify for some level of student loan forgiveness.

On the negative side, most federal student loans feature borrowing limits, so you might need to find supplemental funding or scholarships if your educational costs exceed federal loan maximums.

Private student loans are educational loans you can access from private lenders, such as banks, credit unions and online lenders. On the plus side, private student loans often feature higher loan amounts than you can access through federal funding. And if you or your co-signer has excellent credit, you may be able to secure a competitive interest rate as well.

As for drawbacks, private student loans don’t offer the valuable benefits that federal student borrowers can enjoy. You may also face higher interest rates or have a harder time qualifying for financing if you have bad credit.

Are Sallie Mae loans better than federal student loans?

In general, federal loans are the best first choice for student borrowers. Federal student loans offer numerous benefits that private loans do not. You’ll generally want to complete the Free Application for Federal Student Aid (FAFSA) and review federal funding options before applying for any type of private student loan — Sallie Mae loans included.

However, private student loans, like those offered by Sallie Mae, do have their place. In some cases, federal student aid, grants, scholarships, work-study programs and savings might not be enough to cover educational expenses. In these situations, private student loans may provide you with another way to pay for college.

If you do need to take out private student loans, Sallie Mae is a lender worth considering. It offers loans for a variety of needs, including undergrad, MBA school, medical school, dental school and law school. Its loans also feature 100 percent coverage, so you can find funding for all of your certified school expenses.

With that said, it’s always best to compare a few lenders before committing. All lenders evaluate income and credit score differently, so it’s possible that another lender could give you lower interest rates or more favorable terms.

The bottom line

Sallie Mae may be a good choice if you’re in the market for private student loans and other financial products. Just be sure to do your research upfront, as you should before you take out any form of financing. Comparing multiple offers always gives you the best chance of saving money.

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Tips to do some fall cleaning on your finances

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Wealth manager, Harry Abrahamsen, has five simple ways to stay on top of the big financial picture.

PORTLAND, Maine — Keeping track of our financial stability is something we can all do, whether we have IRAs or 401ks or just a checking account. Harry J. Abrahamsen is the Founder of Abrahamsen Financial Group. He works with clients to create and grow their own wealth. Abrahamsen shares five financial tips, starting with knowing what you have. 

1. Analyze Your Finances Quarterly or Biannually

You want to make sure that your long-term strategy is congruent with your short-term strategy. If the short-term is not working out, you may need to adjust what you are doing to make sure your outcome produces the desired results you are looking to accomplish. It is just like setting sail on a voyage across the Atlantic Ocean. You know where you want to go and plot your course, but there are many factors that need to be considered to actually get you across and across safely. Your finances behave the exact same way. Check your current situation and make sure you are taking into consideration all of the various wealth-eroding factors that can take you completely off course.

With interest rates very low, now might be a good time to consider refinancing student loans or mortgages, or consolidating credit card debt. However, do so only if you need to or if you can create a positive cash flow. To ensure that you are saving the most by doing so, you must look at current payments, excluding taxes and insurance costs. This way you can do an apples-to-apples comparison.

The most important things to look for when reviewing your credit report is accuracy. Make sure the reporting agencies are reporting things actuary. If it doesn’t appear to be reporting correct and accurate information, you should consult with a reputable credit repair company to help you fix the incorrect information.

4. Savings and Retirement Accounts

The most important thing to consider when reviewing your savings and retirement accounts is to make sure the strategies match your short-term and long-term investment objectives. All too often people end up making decisions one at a time, at different times in their lives, with different people, under different circumstances. Having a sound strategy in place will allow you to view your finances with a macro-economic lens vs a micro-economic view. Stay the course and adjust accordingly from a risk and tax standpoint.

RELATED: Financial lessons learned through the pandemic

A great tip for lowering utility bills or car insurance premiums: Simply ask! There may be things you are not aware of that could save you hundreds of dollars every month. You just need to call all of the companies that you do business with to find out about cost-cutting strategies. 

RELATED: Overcome your fear of finances

To learn more about Abrahamsen Financial, click here

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How to Get a Loan Even with Bad Credit

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Sana pwedeng mabura ang bad credit history as quickly and easily as paying off your utility bills, ‘no? Unfortunately, it takes time. And bago mo pa maayos ang bad credit mo, more often than not, kailangan mo na namang mag-avail ng panibagong loan. 

Good thing you can still get a loan even with bad credit, kahit na medyo limited ang options. How do you get a loan if you have bad credit? Alamin sa short guide na ito. 

For more finance tips, visit Moneymax.

 

 

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