A subprime auto loan is a car loan offered to borrowers with poor or limited credit history

Lenders use your credit score to decide whether to lend you money and at what interest rate. A subprime loan is one made to someone whose credit score falls below what mainstream lenders consider acceptable — typically below 620, though this varies by lender. The trade-off is clear: you get access to a car loan when you might not otherwise, but you pay a higher interest rate to compensate for the lender's increased risk.

Subprime auto loans are common. Many people have credit scores in this range because of past missed payments, collections accounts, bankruptcy, or straightforward no credit history at all. If you need a car to get to work or handle family responsibilities, a subprime loan may be the only available route. Understanding how these loans work — what they cost, what happens if you miss a payment, and what alternatives exist — helps you make a decision that fits your actual situation.

Key Takeaways

  • Subprime auto loans charge higher interest rates than prime loans because lenders view borrowers with lower credit scores as riskier.
  • Interest rates on subprime loans vary widely depending on your credit score, the loan term, the vehicle's age, and the lender, so shopping around matters.
  • Subprime loans often come with GPS tracking and starter interrupt devices that let the lender disable the car if you miss a payment.
  • Missing payments on a subprime auto loan can result in repossession within days, which damages your credit further and leaves you without transportation.
  • Building credit through a subprime loan is possible if you make every payment on time, but the high interest rate means you pay significantly more than a borrower with good credit would.

How interest rates and loan terms work in subprime lending

The interest rate on a subprime auto loan depends on several factors: your credit score, how much you are borrowing, how long the loan term is, the age and value of the vehicle, and the lender's own policies. A borrower with a credit score of 550 will pay more than one with a score of 600, even at the same lender. Loan terms typically range from 48 to 84 months, and longer terms mean lower monthly payments but much more interest paid overall.

To see the real cost, look at the total amount of interest you will pay over the life of the loan, not just the monthly payment. A $15,000 car financed at 12% over 60 months costs roughly $4,900 in interest alone. The same car at 18% over 72 months costs roughly $7,200 in interest. The monthly payment might feel manageable, but the total cost is substantially higher. Before you sign, ask the lender for the annual percentage rate (APR) and the total amount you will pay by the end of the loan.

Tracking devices and payment enforcement tools

Many subprime lenders install a GPS tracking device and a starter interrupt device in the vehicle as a condition of the loan. The GPS lets the lender know where the car is at all times. The starter interrupt device — sometimes called a "kill switch" — allows the lender to disable the engine remotely if you fall behind on payments, usually after one missed payment.

These tools exist because subprime borrowers have higher default rates, and lenders use them to recover the vehicle quickly rather than pursue lengthy repossession. From the lender's perspective, this protects their investment. From your perspective, it means your car can stop running without warning if a payment is late, even if you are in traffic or an unsafe location. Some states regulate how and when these devices can be used, but many do not. Before signing, ask whether the loan includes these devices and what the lender's policy is on activating them.

What happens if you miss a payment

Subprime lenders are typically more aggressive about repossession than prime lenders because the borrowers they work with have a history of missed payments. In many states, a lender can repossess your car after a single missed payment, though many wait until you are 60 or 90 days behind. If your car has a starter interrupt device, the lender may disable it before physically repossessing it, giving you a chance to catch up. If you do not, the vehicle is towed and sold at auction.

Repossession damages your credit score significantly and stays on your credit report for seven years. You may also owe a deficiency judgment — the difference between what the lender sells the car for at auction and what you still owe on the loan. If you owe $10,000 and the car sells for $6,000, you could be responsible for the $4,000 difference, plus repossession and auction fees. If you fall behind, contact your lender when ready to discuss a payment plan or loan modification before repossession happens.

The cost of building credit through a subprime loan

One reason people take subprime auto loans is to build or rebuild credit. If you make every payment on time, the lender reports your payment history to the credit bureaus, and your credit score can improve over time. This is a real benefit — a year or two of on-time payments can move your score from the subprime range into the prime range, opening doors to better rates on future loans.

The catch is the price you pay for that opportunity. If you could have waited, saved a larger down payment, or found a co-signer with better credit, you would have paid substantially less interest. A subprime loan is a tool for building credit when you need a car now, not a bargain. Calculate whether the interest cost is worth the credit improvement you expect, and whether you could meet your transportation needs another way in the meantime.

Alternatives to subprime auto loans

Before committing to a subprime loan, explore other options. A credit union may offer lower rates than a subprime lender, even with a lower credit score — credit unions often consider factors beyond just your score, like employment history and savings. Some credit unions offer credit-builder loans specifically designed to help people improve their credit, and you can use that improved score to refinance an auto loan later.

A co-signer with good credit can help you may have access to for a prime loan at a much lower rate. The co-signer is legally responsible for the loan if you do not pay, so this only works with someone you trust and who understands the commitment. Buying a used car outright with cash, if you can save enough, avoids debt entirely. Delaying the purchase for six months to a year while you build credit or save a larger down payment can also reduce the amount you need to borrow and lower the rate you may have access to for.

Shopping for a subprime auto loan

Interest rates vary significantly between lenders, so getting quotes from multiple sources matters. Banks, credit unions, online lenders, and buy-here-pay-here dealerships (which finance cars directly) all offer subprime loans at different rates. Some dealerships have relationships with subprime lenders and can arrange financing on the lot, but this is often more expensive than shopping independently first.

Get pre-approved by a lender before you go to a dealership. Pre-approval tells you the rate you actually may have access to for, rather than relying on the dealership's quote. When you shop, compare the APR, the loan term, the monthly payment, and any fees — documentation fees, dealer fees, and GPS device fees all add to your total cost. Ask about early payoff penalties; some subprime loans charge a fee if you pay off the loan early, which limits your ability to refinance later if your credit improves.

Frequently Asked Questions

Can I refinance a subprime auto loan if my credit improves?

Yes, if your credit score rises enough and you have made on-time payments, you may may have access to for a prime loan at a lower rate. Contact lenders after six to twelve months of on-time payments to see what rate you may have access to for. Some subprime loans include early payoff penalties, so check your contract before refinancing. Refinancing can save you thousands in interest if your new rate is significantly lower.

What is a buy-here-pay-here dealership?

A buy-here-pay-here dealership sells used cars and finances them directly to the buyer, rather than arranging a loan through a bank or lender. These dealerships typically work with subprime borrowers and often require weekly or bi-weekly payments made in person at the dealership. Interest rates are often higher than bank subprime loans, and the cars are usually older with higher mileage. Use this option only if you cannot may have access to elsewhere.

What should I do if I cannot make a payment?

Contact your lender as soon as you know you will miss a payment. Many lenders offer loan modifications, payment deferrals, or temporary payment reductions for borrowers facing hardship. Asking before you miss a payment is far better than waiting — it shows good faith and gives the lender a chance to work with you before they set up a starter interrupt device or begin repossession. Put any agreement in writing.

Does a subprime auto loan hurt my credit score?

Taking out any loan causes a small, temporary dip in your credit score because the lender checks your credit and adds a new account. However, making on-time payments rebuilds your score over time. Missing payments or defaulting on a subprime loan damages your credit far more than the initial dip. If your goal is to build credit, a subprime loan works only if you can afford the payments consistently.

Can I negotiate the interest rate on a subprime auto loan?

Interest rates on subprime loans are less negotiable than prime loans because they are based on risk assessment, not dealer markup. However, you can negotiate other terms: the loan length, the down payment amount, and fees. A larger down payment reduces the amount financed and can lower your rate slightly. Shopping multiple lenders is more effective than negotiating with a single lender.