Understand the difference between prime and subprime car loans
Understand the difference between prime and subprime car loans
If you have just received the shocking bad news, your recent credit application has been declined due to your credit rating. You are probably new to the world of subprime financing. Your recent visit to the bank or the car dealership may have opened your eyes to a brand new term you are not familiar with called “subprime”. Just like the name suggest subprime loans are less than prime, it is the category “B” or the B class lenders. It means you are now no longer qualifies for A class loans from the local banks or other lenders. There are few subtle differences between the class A loans versus the class B, and in this article we will go through them one at a time.
First of all your interest rate for the class B loan will be much higher compare to A, this is because you are now deemed to be high risk for defaulting on your loan. This calculation is based on several factors, things like your income to debt ratio, credit score, your payment history are all part of this equation. Let’s take a closer look at your typical class A loans. The prime loan market will usually offer an interest rate from 8-9% from your local bank, if you think this percentage is already high, you are probably thinking of the 0% financing on brand new cars that is not really 0%. Some of the vehicle manufactures will buy down their interest rate from their creditor just to show you a lower amount, but in reality they are paying for an interest rate of 6-7% behind the scene for you. So in real life there is no 0% interest loan on anything, it is just a marketing gimmick. Class B or subprime loans will carry an interest from 12 – 29% in Canada; this is considerably higher compare to the prime loans. But if you are in need of a vehicle and there is no other way out, you have to stick to these high interest loans just to get approved.
The subprime car loans are not all that bad; it is your chance to recover your credit rating. Think about this if you are in school and been sent to detention for few days is very much like the subprime loan practice. It is your chance to show the banks you are financially responsible for your loans, and you are now paying it back on time and in the near future you may qualify once again for the prime loans. These bad credit car loans are “transitional” loans where you can use this opportunity to prove yourself to the banks. So the next time you need a vehicle and can’t get approve from anywhere, take on a bad credit car loan just to rebuild your credit over time.
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