Subprime Auto Lenders: How To Avoid Their Financial Disaster Trap

Subprime auto lenders, such as Westlake Financial, Credit Acceptance, Consumer Portfolio Services, and Ally, to name a few, provide credit to auto buyers with subpar credit (specific threshold varies, but typically a FICO score below 620). While it may be tempting to obtain a loan through a subprime lender, the financial consequences can be devastating.

Subprime lenders provide consumers with poor credit with very high-interest loans, resulting in paying far more than a vehicle is worth, and almost immediately creating significant negative equity. This means that, prior to driving the vehicle off a dealership’s lot, the buyer owes significantly more than the vehicle is worth.

If the buyer falls behind on the loan payments, the vehicle is repossessed and sold at a fraction of its value. This leaves the buyer owing money on a loan for a vehicle they no longer possess.

Studies show that subprime borrowers are several times more likely to lose their cars to repossession than buyers with better credit. Some auto dealers, particularly “Buy Here, Pay Here” lots, make significant profits on subprime loans by banking on high default rates and vehicle repossession.

Repossessions are extremely disruptive because the consumer loses access to their vehicle, which may be the only means of transportation to work, and they’re still required to repay any outstanding balance on the loan, plus fees associated with the repossession.

Auto dealers frequently encourage, and in some cases pressure, buyers into subprime loans. They’re often told it’s their only option, and for some, it may well be. Dealerships often assure customers that as long as the monthly payment “fits their budget,” everything will be fine. What they don’t explain is how much of that payment is interest and how long the buyer will be stuck in the loan. By the time the buyer realizes the true cost, they’re often trapped.

To avoid this potential financial disaster, it is important to put as much cash down for the vehicle as possible and to obtain your own financing via a credit union or lender of your choice.

Subprime Auto Lenders

Regulators and consumer advocates have long warned that high‑cost subprime auto loans carry a much greater risk of missed payments and repossession. In the video below, you’ll see how that risk plays out in the real world.