Subprime Loan

By: EconomyWatch Content   Date: 27 November 2009

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Loan applications from individuals with low credit ratings or other factors suggesting a risk of default on debt repayment are often turned down by traditional lenders. These individuals can apply for a subprime loan to get the required funds. A subprime loan is usually offered at a rate above the prime rate to compensate for the high risk associated with a subprime lending candidate. The US Department of Treasury guidelines issued in 2001 describe subprime borrowers as those people who typically have weak credit histories as a result of:

  • Payment delinquencies

  • Issues such as charge-offs, judgments and bankruptcies 

Subprime Loan: Things to Keep in Mind

Before opting for a subprime loan, you must consider the following factors:

  • Subprime loans should typically be used as a short term solution going up to a maximum of four years. During that time, you can work to improve your credit and qualify for a prime rate or opt for refinancing with a lower risk, lower rate loan.

  • A subprimeloan rate can vary considerably. Therefore, it is best to shop around if subprimeloans are the only option left for getting funds, since every lender has different criteria for determining creditworthiness.  

Subprime Loan: How to Choose a Subprime Lender? 

The few points that you must consider while selecting a lender are:

  • Fees and terms: These differ with each subprime loan lender. Get the fees and terms in writing and go through this information carefully.

  • Willingness of the lender to work with you. Stay away from lenders who coax borrowers into believing that they have to pay high upfront fees and follow several restrictions. This may not always be the case. A credible subprime loan lender will charge nominal fees. If the upfront fees seem extremely high, they should be ignored.

  • Willingness of a lender to negotiate the interest rate. Subprime loans can be negotiated to a point.

  • Verify the credibility of the subprime lender. Contact local business bureaus for referrals or check business credentials to protect yourself against scams.

  • Pre-payment penalty. The absence of a pre-payment penalty or a minimal pre-payment charge will help a borrower refinance the subprime loan to receive better terms. Select a lender who is ready to forgo the penalty clause in the loan.


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