Is your car loan too expensive?

As the U.S. economy recovers from the recession, many lenders have eased financing standards, resulting in an increase in loans available to consumers with poor credit. The earliest and strongest recovery came in the auto market, and while a bump in subprime used-car lending has triggered some murmuring of a bubble, it appears to be more a resurgence of a market that was tightly restricted during the recession.

"These are obviously consumers that need transportation, and there's a lot of options out there for them," said Melinda Zabritski, senior director of automotive credit for Experian Automotive.

More Loans for the Credit Challenged

Deep subprime used auto loans (those given to consumers with a VantageScore between 300 and 549) have made up more and more of the market in the last few years: In the beginning of 2008, deep subprime borrowers made up 21 percent of used auto loans, but in the first quarter of 2013, that share was at a low of 16.17 percent. It grew to 19.6 percent this year.

Meanwhile, the 30-day delinquency rate (14.26 percent of deep subprime loans) is lower than it was in 2006 (14.61 percent), when Experian first started publicly reporting the data, and much lower than last year (15.24 percent) and in 2012 (15.3 percent), Across all risk tiers, delinquency rates have hit historic lows recently, according to data drawn from Experian-Oliver Wyman Intelligence Reports and Experian's IntelliView tool.

How Much Will Bad Credit Cost You?

At the same time, access isn't everything: Borrowers with poor credit may find it easier to get a used car loan these days, but they're paying more for it. Interest rates have generally climbed, as have the amounts financed, but when you look at the deep subprime borrowers, the story is a little different. Consumers with bad credit are financing less than they were last year (down to an average of $14,014 from $14,094 in 2013) and are paying a lot more for it.

Lenders are exceedingly cautious with credit-poor drivers: The average interest rate on a used car for these borrowers was 18.62 percent at the start of 2014, which is much lower than the average 14.53 percent rate for the next risk tier up (subprime borrowers with scores between 550 and 619). The next cutoff is even more extreme, with middle-tier, nonprime borrowers getting an average 8.31 percent on their used-car loans. All of these rates are up from 2013, but deep subprime borrowers saw the largest jump. (On the other end of the spectrum, prime consumers had used auto loans with interest rates averaging 5.13 percent, up from 2013, and borrowers with top credit scores receive an average rate of 3.5 percent, down from 2013).

Say you take out a $14,000 car loan with a 60-month term. The difference between a subprime borrower and a deep subprime borrower could amount to about $1,800 of savings over the life of the loan — that's a significant difference, and that's just for a consumer with poor credit, rather than terrible credit. The better your credit standing, the more you can potentially save.

If you're looking for a better deal on your used car loan, look at your credit first. A few score points could make a huge difference in what you pay for transportation.

"The loans end up being priced higher to account for the very high default rate," Zabritski said. People with bad credit tend to fall behind on payments more than people who have better credit scores, so if you don't want that risk label and the associated costs, you need to make some changes.

There's not much you can do if you need a car right now, but that's why planning ahead, monitoring your credit and following a plan to build or maintain good credit can help you save money in the long run. If you're thinking of buying a car and are curious how your credit may affect how much it costs you, you can look at your free credit data using Credit.com. Sometimes it just takes small changes to give your scores a boost, which can make a huge difference to your bottom line.

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