Rates to Expect for a Subprime Car Loan

A subprime car loan is issued under the national prime interest rate. The prime interest rate is set by the Federal Reserve, and the rate adjusts to manage the credit markets more effectively. When you do not qualify for a fixed rate loan, your lender may offer you a subprime loan in order to allow you to gain financing.

Rates Start Low

Rates below prime are very low. Lenders are actually losing money on the loan during this timeframe. You will find your monthly payments at the beginning of your car loan are extremely manageable if not downright cheap. This may be attractive to low credit borrowers, but you should be wary of the adjustment period. 

Rates Adjust Quickly

Once rates adjust, which they do very quickly, you will find your new payments may be unmanageable. Subprime rates adjust to levels much higher than a standard loan. Unless you have built in limits on how high the rates can adjust, you may be facing a default on the car loan when the monthly payments become unmanageable. It is better to avoid a subprime loan for this reason. If you must take one, then work with your lender to set a cap on the interest rate and prevent a detrimental situation.