Why Are Interest Rates Higher on Auto Loans With Bad Credit?
Scott Stanko asked:
When your credit score gets below a certain point you may have to turn to sub prime lenders for your auto financing needs. As you apply for these types of loans you will notice that their interest rates are considerably higher than your traditional lending sources you have used in the past. Although it may feel like it, sub prime lenders do not charge higher rates just because they think you are a bad person, or to punish you for your current financial situation. There are some very real and calculated reasons that the rates are higher on these types of loans.
1) Higher Risk Of Loss- Sub prime lenders have much larger default rates as a percentage than regular prime banks do. When a lender has high default rates they have to charge a higher rate of interest on all their loans to help off set the losses they incur on the defaults. Banks are in the business of making money and charging higher rates allows them to collect more money in interest up front and hopefully remain profitable after the losses they incur. If they were to charge low rates on all their loans and still incurred the same amount of losses they would go out of business because the losses would exceed the income that their loans generate.
2) Higher Collection Costs- When a lender has higher default rates they also incur higher collections expenses. Repossession, legal, title, and staff expenses all increase when you have large amounts of loans that default. All these expenses affect the lenders bottom line.
3) Verifications- Sub prime lenders have very strict guidelines that they have to follow. Before any sub prime lender will disperse funds on a loan they will verify all the information you provide on your application. Staff is needed to contact employers, landlords, mortgage companies, and insurance companies. This can be a long and tedious process that takes time and hourly employees.
As you can see there are some very real expenses that sub prime lenders incur as cost of doing business. The best plan is to make timely payments on this loan and as your credit score starts to rise look to refinance through a prime lender at a lower rate in the future.
Juan
When your credit score gets below a certain point you may have to turn to sub prime lenders for your auto financing needs. As you apply for these types of loans you will notice that their interest rates are considerably higher than your traditional lending sources you have used in the past. Although it may feel like it, sub prime lenders do not charge higher rates just because they think you are a bad person, or to punish you for your current financial situation. There are some very real and calculated reasons that the rates are higher on these types of loans.
1) Higher Risk Of Loss- Sub prime lenders have much larger default rates as a percentage than regular prime banks do. When a lender has high default rates they have to charge a higher rate of interest on all their loans to help off set the losses they incur on the defaults. Banks are in the business of making money and charging higher rates allows them to collect more money in interest up front and hopefully remain profitable after the losses they incur. If they were to charge low rates on all their loans and still incurred the same amount of losses they would go out of business because the losses would exceed the income that their loans generate.
2) Higher Collection Costs- When a lender has higher default rates they also incur higher collections expenses. Repossession, legal, title, and staff expenses all increase when you have large amounts of loans that default. All these expenses affect the lenders bottom line.
3) Verifications- Sub prime lenders have very strict guidelines that they have to follow. Before any sub prime lender will disperse funds on a loan they will verify all the information you provide on your application. Staff is needed to contact employers, landlords, mortgage companies, and insurance companies. This can be a long and tedious process that takes time and hourly employees.
As you can see there are some very real expenses that sub prime lenders incur as cost of doing business. The best plan is to make timely payments on this loan and as your credit score starts to rise look to refinance through a prime lender at a lower rate in the future.
Juan
