What Is a Subprime Loan?

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How Do Subprime Loans Work?

A subprime loan is a loan that is given to people with a bad credit record. The interest rate on a subprime loan is likely to be a lot higher than an interest rate you would expect on a loan from a bank.

A type of loan that is offered at a rate above prime to individuals who do not qualify for prime rate loans. Quite often, subprime borrowers are often turned away from traditional lenders because of their low credit ratings or other factors that suggest that they have a reasonable chance of defaulting on the debt repayment.

Subprime loans tend to have a higher interest rate than the prime rate offered on traditional loans. The additional percentage points of interest often translate to tens of thousands of dollars worth of additional interest payments over the life of a longer term loan.

Many people will use a subprime loan when they cannot get credit to help repair their credit rating. There could be many reasons why a person would fall behind on their credit payments. An unexpected job loss, an illness or just bad debt management can start a downward spiral of late debt payments. Once a few payments have been missed, the interest can start escalating at a frightening rate.

Once you have a bad credit history you may find it hard to open new accounts, gain credit or be accepted for a mortgage. The subprime loan lender will take into account how severe the bad credit history is. From the credit rating he will calculate the amount of interest, depending on how good or bad a risk the borrower is.

One very important factor for the borrower when considering a subprime loan is to remember not to take the first loan offered. Shop around and get the best quote you can. There are plenty of reputable loan companies out there willing to offer a subprime loan. To counterbalance the good companies there are also bad ones who will milk the interest rate to the limit.

There is a also a degree of negotiation available when considering a subprime loan. Lenders of this type of loan usually finance the loan through a third party, so the lending rules are slightly more flexible. Try and negotiate, if you can, for the best interest rate.

Also consider the repayment timescale you wish to pay the loan back in. This type of loan is good for repairing credit records but you may not wish to repay the loan over a long period. You might take out a loan over 5 years and then circumstances may change and you can pay it back sooner. If you think this may be the case, ask what the lenders early repayment rule is.

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