Alternative Financing Options for New Vehicles

If you can't obtain a traditional vehicle loan approval through a dealership or local bank, alternative financing may prove to be a lending option. Subprime lenders extend loans to people with poor or limited credit, also known as high-risk borrowers. Before pursuing a loan from an alternative source, consider your budget and the benefits and disadvantages of alternative lending.

Subprime Lending

You can locate a subprime lender online, locally or through a dealership. Rates are higher than normal, and many subprime lenders require a significant amount of money down. Shortened terms, higher rates and money down requirements may prove unfavorable, but this might be the only option for some borrowers. You'll likely have to shop for a new car with enough rebates to offset money down requirements, so obtain a pre-approval from a subprime lender before you begin your car search.

Co-signer

If you don't want to use a subprime lender, consider applying for your loan with a co-signer. A good co-signer should have good to excellent credit, a stable income and verifiable employment and address history. With a good co-signer, you can take advantage of low interest rates and longer terms. However, locating a co-signer may not prove easy. The co-signer is liable for your loan as if it were his own. If you're late on payments, it affects the co-signer's credit. Consider asking a close friend or family member.

Interest Rates

Subprime interest rates are not competitive -- they can be as high as 29 percent in some states. High rates can raise your car payment substantially. If you can obtain lending with a co-signer, you can shop for good rates instead. You can find rates as low as zero percent for some new cars. Because a high interest rate increases your payment, you may find you can't afford the high payment a subprime lender offers.

Warning

If you plan to use a subprime lender, budget your payments. Do not take out a loan you can't afford, even if an alternative lender is your only option. If you default on your loan, your credit will suffer immensely. If your payment is too high, pursue a used-car purchase instead. Even if you have to buy a car without the options you truly want, your credit will improve over the term of your loan if you make your payments on time. With good credit, you can likely pursue a new-car purchase for a better rate and payment in the future.