A WEALTH OF KNOWLEDGE ARCHIVES

Dealing with a Subprime Car Loan

May 9th, 2011, byMichelle Singletary

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Q: I made a terrible mistake. Because I have a credit score in the upper 400s and badly needed transportation, I made a terrible deal with a dealership. This dealership claimed they are there to help people with bad credit get into a vehicle. Well, I decided to give them a try. I drove off their lot with a 2002 Ford Taurus that had 100,000+ miles on it for $10,600—which ended up really being $16,000 after all of the “fees” and an interest rate of 22%. The night I drove it off of the lot, I knew I made a terrible mistake. I felt so bad about the deal that I literally became nauseous. Now I’m stuck with paying $345 a month for 4½ years.

It wasn’t until I attended a financial workshop that I was informed transportation cost should be 18% of your salary. My monthly salary is roughly $2,600, which means I should only spend $468 (including insurance and gas). I’m spending $345 + $180 for insurance + $250 for gas, for a total of $775.

What options do I have? What would you do?

Atlanta, GA

A: What you got was a subprime loan. Such loans carry higher interest rates for borrowers with low credit scores or shaky credit histories. Credit scores in the 400s definitely put you right where you found yourself.

There are guidelines that help people figure out what percentage of their net monthly pay should be spent on various budget categories. Some experts do list 18% for transportation, but the exact percentage can vary depending on a number of things, including your family size. I think spending 18-20% is still too high. For example, your car insurance costs are extremely high at more than $2,000 a year.

Before getting to the car loan, I suggest you try to bring down the cost of insurance by comparison shopping or perhaps increasing your deductible. You might also see if you can cut your gas costs. For example, can you carpool to work? Is public transportation an option?

As for the car loan, you might be able to refinance that loan after a year, if you can bring up your credit scores. One sure way to increase your credit score is to pay all your bills on time.

When you check with your bank or credit union, see if either can offer you a better deal. If not now, a loan officer may be able to give you guidance on how you can qualify later for a better interest rate with a refinancing.

One thing to consider in the future, dealers can mark up the interest rates on car financing. That means you may pay a higher interest rate just by going through the dealership, especially if you have bad credit. It’s always best to see what a lender will offer you before shopping for your car.

Further, in the future, when a deal doesn’t sit right with your gut, listen to your gut. It’s rarely wrong.

Last modified: May 9, 2011 at 2:57 pm