Car finance deals explained
This has led to MPs voicing concerns over the current state of subprime car finance in the UK, Rachel Reeves, the Labour MP for Leeds and former shadow Treasury minister said: “Household debt is back at levels seen just before the financial crash. That should send a chill down the spine of the Bank of England and Treasury.
“In 2008, subprime mortgages were a big problem – missed by policymakers. Today it’s car loans and other forms of consumer credit that are accelerating. Car companies are vulnerable to bad debt and defaults while buyers are racking up debt that may well turn out to be unaffordable.”
John Penrose, Conservative MP for Weston, Worle and The Villages said: “Unless we have pitiless transparency in the car loans market, with industry standards to measure and report the risks in this fast-growing area, we won’t be able to spot problems in advance.”
What is a subprime or bad credit car loan?
A subprime loan is simply a loan made by a lender to a party who may have more difficulty maintaining the repayment schedule than the average car buyer. In car finance there’s not a single cut off point that means a buyer suddenly becomes ‘subprime’. And while there are specific subprime car finance providers, subprime loans can also be obtained through mainstream lenders.
There are several factors that could lead to a borrower being considered ‘subprime’ by a lender. These include a lack of credit history, previous and excessive debt, previous failures to pay debt, bankruptcy and other caveats corrosive to a person’s credit score. Any one or combination of these factors could lead to someone being refused car finance and as avenues to finance a new car close off, buyers can be funnelled towards finance deals and lenders designed to cater for subprime customers.
Should you avoid subprime car finance?
Not necessarily. If your credit score isn’t very high for any particular reason, but you have the finances to pay back the loan, then there is nothing wrong with a subprime car loan. All it means is that you’re probably going to pay more in interest and fees than a borrower able to buy from a dealer or lender offering standard car finance deals.
However, there are major pitfalls that one can easily fall into in the rush to get a new car on your driveway. It’s imperative that before you sign on the dotted line you understand all of the terms and conditions of the agreement, and more importantly are able to adhere to them. Don’t take out a finance deal that you can’t afford to pay back and that means understanding exactly what the agreement is going to cost you over its entire term.