Why Are Interest Rates Higher on Auto Loans With Bad Credit?
by Jon Reyes
Are you trying to get a car loan and you keep getting denied? Well, they might be a lot of reason why you are being denied. One of the obvious reason you are not getting that loan for that car you so much desire could be due to your credit report. When you bring your application to a loan company, the first thing they look at is your credit report. When your score on your credit report is low, most company will find it difficult giving you a loan. Your best option will be to turn to sub prime lenders.
Sub prime lenders are lenders who give loans to people who have low credit score. These people are often referred to as high risk borrowers. One of the things that you will notice with sub prime lenders is the interest rate which they will charge on the loan. The loan rate might differ just a little bit from the traditional lenders or might be very high depending on the credit risk of the borrower. The ability for a borrower to repay determines the amount of interest rate a lender will charge.
Here are some of the few things sub prime lenders consider when giving out loans to people with poor credit.
Risk Of Loss: Many of the sub primes lenders have huge default rate. This huge default rate is caused by the inability for the borrowers to pay back. You would wonder with such a huge default rate, why these lenders will continue to give out loans. Well, that is why they charge higher interest rate because it helps offset any losses incurred by a borrower. Moreover, the car will also be used as collateral.
Despite these huge losses, they still make money. If they give out loans with the traditional interest rate regularly charged, they will be out of business in no time.
Higher Collection Cost: Since a lot of borrowers default on their loans, collection cost for repossession, fees that include default charges, title and employee expenses will definitely increase. All these add up to why the lenders charge a higher interest rate.
verification: Getting a loan from a sub prime lender is much more strict when it comes to verification of the information you provided when applying for the loan. Most traditional lenders will be satisfied with just checking your information on your report and your place of employment. Sub prime lenders will have to do an extra check on your information since they are take a much more higher risk in giving you a loan.
As long as there are people with poor credit that need loans and sub prime lenders are willing to lend, they will have to keep charging higher interest rate to offset their other cost.
Sub prime lenders are lenders who give loans to people who have low credit score. These people are often referred to as high risk borrowers. One of the things that you will notice with sub prime lenders is the interest rate which they will charge on the loan. The loan rate might differ just a little bit from the traditional lenders or might be very high depending on the credit risk of the borrower. The ability for a borrower to repay determines the amount of interest rate a lender will charge.
Here are some of the few things sub prime lenders consider when giving out loans to people with poor credit.
Risk Of Loss: Many of the sub primes lenders have huge default rate. This huge default rate is caused by the inability for the borrowers to pay back. You would wonder with such a huge default rate, why these lenders will continue to give out loans. Well, that is why they charge higher interest rate because it helps offset any losses incurred by a borrower. Moreover, the car will also be used as collateral.
Despite these huge losses, they still make money. If they give out loans with the traditional interest rate regularly charged, they will be out of business in no time.
Higher Collection Cost: Since a lot of borrowers default on their loans, collection cost for repossession, fees that include default charges, title and employee expenses will definitely increase. All these add up to why the lenders charge a higher interest rate.
verification: Getting a loan from a sub prime lender is much more strict when it comes to verification of the information you provided when applying for the loan. Most traditional lenders will be satisfied with just checking your information on your report and your place of employment. Sub prime lenders will have to do an extra check on your information since they are take a much more higher risk in giving you a loan.
As long as there are people with poor credit that need loans and sub prime lenders are willing to lend, they will have to keep charging higher interest rate to offset their other cost.
