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What You Should Know About Subprime Car Loans

Jan. 27, 2014
3 mins
A woman driving her car glances and smiles at her un-pictured passenger

If you’ve driven past a car dealership lately, you’ve probably seen the signs: “0% financing on all remaining models!” But that doesn't mean YOU can score that deal.

Close to one-third of Canadians looking to finance the purchase of a new or used vehicle aren’t eligible for such prime interest financing, according to industry estimates. Of course, that doesn’t mean no one is going sell them a car. It’s just going to be financed through a subprime lender like TD Non Prime, Scotia Dealer Advantage or, the newest Canadian subprime player, Canadian Title Loan Corporation. So what should consumers know about taking on subprime loans?

Poor credit leads to problems

Subprime lenders make loans to people with significant credit problems, either due to poor money management skills or personal setbacks such as job loss, divorce, medical emergencies and bankruptcy.

Not surprisingly, these subprime car loans have higher interest rates and less favourable terms in order to compensate the lender for the higher credit risk. There’s no question that losses are higher on loans made to customers with a poor record of repayment or little credit history – but it’s still good business for lenders.

While subprime mortgages were among the first to falter when the U.S. housing market fell apart a few years ago, car loans are a different matter. Even though they may have been less than diligent when it came to looking after their mortgages, most borrowers continued to make their car payments – largely because they needed their vehicles to get to work.

Some consumers are easily misled

Anyone with a less than stellar financial record knows they’re going to have to work a little harder to get credit, but, as one B.C. couple found out recently, be careful what you wish for. Despite the fact that they’d actually declared bankruptcy four years ago and were still recovering financially, Angie Houser and Enzo Gamarra were approved for a car loan by an Okanagan dealership backed by TD Bank’s subprime division. The interest rate: an eye-popping 25%.

While negotiating, the desperate couple were led to believe that if they stayed on schedule with their payments for a full year, they could refinance at a lower rate. But, after that deadline came and went, their refinancing request was rejected – largely because of their previous bankruptcy, despite their lender being aware of it all along.

Interest rates are seldom renegotiated

Since the couple’s story aired on a CBC consumer advocacy show, disgruntled borrowers have been lining up, claiming they too were deceived by other dealers into believing their equally high interest charges would be lowered after a year.

They only signed the papers, they claim, because the dealership assured them that if they stayed on schedule, they would get a shot at a lower rate after a year. But that’s really wishful thinking. Unless you’re refinancing to take another car off the lot, most lenders aren’t in a hurry to rewrite existing loans – despite what an eager salesperson might have you believe.

Should you get a subprime car loan?

Before you look around for financing, know where you stand. Many lenders consider a credit score of less than 620 to be subprime territory. Not sure where you rank? Your best bet is to obtain a credit report.

Once you know how others view your credit situation, you can begin to look for ways to improve it. When you do settle on a vehicle, get everything in writing. That means anything to do financing, interest rates, and the term of the loan – including when and if it might be renegotiable. Better yet, pay cash.

Gordon Powers

A long-time fund company executive, Gordon Powers now heads up the Affinity Group, a consulting firm focusing on retirement readiness. Gordon was a columnist for the Globe & Mail and Morningstar for many years and is also currently a columnist for Investment Executive, Canada’s national newspaper for financial advisors.

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