Subprime loan definition was made up after crisis that took place in 2008 and since then it was used to describe “high risk” loans. For now the majority of debts made are stated to be subprime.
Subprime loan characteristics:
- borrower has low credit
- high interest rate
- low repay rate
Borrower Has Low Credit
Usually that means that borrower either has low income (or not stable income) or high debt load. This also can happen if borrower had no option to improve credit – this is usually applicable to students and those who had just graduated.
To be specific the credit is considered to be low is it is below 580-640 score. So borrowers with such a rating get subprime loans on terms that are much worse than for prime borrowers.
High Interest Rate
Due to the low credit it is obvious that bank or credit organization has less chances that loan is going to be repaid, so borrower has to cover this risk with higher monthly payments. To be specific the difference of interest rate offered to prime and subprime borrower can make 40-140%.
Low Repay Rate
This is the main grounding of subprime loans being more expensive than prime loans. Due to the fact borrowers have less spare funds and more serious circumstances in case of losing income which is used for debt covering of loans are not being repaid.
However, there is other side of the matter as well. It is against logic to give loans at higher stakes for those who are less likely to repay those. This is one of the reasons why predatory lending is so profitable and popular.
How Can Subprime Loan Be Used?
There are no limitations to the loan goals when it comes to subprime lending. Such a debt can be used to cover day-to-day expenses, scholarship or even mortgage. By the way the most popular type of subprime loan is an unsecured personal debt.
How to Avoid Taking Subprime Loans?
Generally, all you have to do is to make sure you are viewed by the lender as a credible borrower. If your credit is higher than 640 in most of the cass you will get good terms as a prime borrower.
You can check your credit score for free here – you will get precise and accurate information on how lenders evaluate your financial status.
You should also make sure your income is high enough so that the monthly payments for debt you are going to take won’t be covered by more than 30% of your income (this is specifically used for mortgage calculation). Otherwise it is better to close all other debts and optimize your expenses as much as possible.
One more way to avoid taking subprime loan is to choose right lender. It is not a good idea to request mortgage loan from bank that specializes on business loans.
To conclude you can take a co-sign loan if you have someone with a good credit score willing to guarantee repayment of your loan. This would allow you to improve loan terms dramatically.