Since the start of the COVID-19 pandemic and the dramatic slump in car sales that followed, automakers have been scrambling to salvage any new car demand they can find. A large part of this strategy has been a "we're coming to the rescue" message which includes unprecedented new car financing deals. Nearly every major automaker has promoted deals ranging from 0% APR for 84-months to car payment deferrals for up to 4 months. While these incentives can put a car shopper's mind at ease during the crisis, they can also prove to be misleading for those with compromised credit.
Subprime vs. Good Credit Car Loans Amid COVID-19
A report released by the Consumer Financial Protection Bureau’s Consumer Credit Panel (CCP) shows the impact of the COVID-19 crisis on credit applications through the month of March. This report includes data for auto loan inquiries and shows the differences in behavior for borrowers with subprime and prime credit scores. Some findings of the report are not surprising, like overall auto loan inquiries dropped by 52% between the first and last week of March, and states with the highest number of COVID-19 cases had the lowest number or credit inquiries.
The more surprising finding is that the drop in auto loan applications was more significant for customers with good credit scores than for those with subprime credit. Customers with subprime scores (a
Vantage score below 500) experienced a 49% drop in inquiries, while consumers with super-prime credit (a Vantage score above 780) experienced a much larger 67% drop. There are many potential reasons for this trend, and the CFPB speculates that consumers with super-prime credit have more flexibility in forgoing a credit application. However, there is also the possibility that subprime shoppers are being tempted by all the automaker financing offers more than the super-prime shoppers who the offers are intended for.
Why Should Subprime Car Shoppers be Wary?
Visit any automaker's website and you'll see offers like NO MONTHLY PAYMENTS FOR 120 DAYS or 0% APR for 84-MONTHS displayed prominently on the homepage. The stipulations for the offers, on the other hand, are hidden in an asterisk or in the fine print. For example, Jeep's 0% APR for 72 months offer is clarified in fine print: For well-qualified buyers, not all buyers will qualify for the lowest rates. Must receive financing through Chrysler Capital. Nearly every automaker's financing offer came with similar stipulations, and while it may not be an intentional bait-and-switch tactic, car shoppers with compromised credit should approach with caution. If they are approved, the APR rate will likely be much higher than advertised.
Car shoppers should also be aware of the dangers of long-term car loans and car payment deferral offers which can sound tempting but can be damaging in the long run. While an 84-month car loan can offer lower monthly payments, it also puts the borrower in danger of going upside down on the loan which means they'll owe more on the vehicle than it is worth. If you hold on to the vehicle for a long time (10 years for example) the risk is reduced, but if you need to trade-in or sell the vehicle after a few years, a long term loan spells trouble. Car payment deferrals offer peace of mind in the event of a job loss during the crisis, but they also extend the time it takes to pay off the loan and the risk of going underwater.
Buying a Car With Subprime Credit
Although putting off a car purchase until a good credit score is achieved is the best scenario, we know it's not always realistic. With the uncertainty of public transit and ride-sharing during the pandemic, a safe personal vehicle can be a necessity. Car shoppers with compromised credit should approach new car financing incentives with caution and consider looking for a used car deal instead. Used cars will come with a lower price tag, monthly payment, and down payment requirement.
Instead of counting on the 0% APR offer through the automaker's finance division, seek out alternative lenders like credit unions and online subprime auto lenders who specialize in bad credit auto loans. Since interest rates can skyrocket for shoppers with compromised credit, cross-shopping offers by getting pre-approved through multiple lenders will yield the best chance at the lowest rate. Avoid the temptation to stretch out a car loan over a long time frame like 84-months even if you qualify, and prepare a down payment of at least 10% for the best odds at approval and a fair interest rate.