In a nutshell, subprime loans are loans given to borrowers with credit history issues. This applies to other types of subprime loans like subprime auto loan, subprime mortgages and credit card lending. Unlike prime loans which are loans offered to borrowers with excellent credit history, subprime loans often bear high interest rates because the lenders are risking their chances of getting repaid on borrowers with bad credit history.
Nonetheless, subprime loans extend financing offers to those who are not qualified for a loan. Here are some ideas regarding subprime loans.
A lender’s main focus is to assess the borrower’s ability to repay a loan. If a lender sees you as a risk because of certain credit history issues, it may likely result to a high interest rate or even a rejected application.
Some reasons as to how a borrower is classified as subprime include:
Late payments in other credit lines such as credit cards, mortgages and other loans may be reported to credit bureaus. Consequently, this can have a negative impact on your credit score which is a very important aspect in a loan application. To add, recent histories of late/outstanding payments bear a greater effect than old records.
Bankruptcy happens for a lot of reasons, whether due to reckless spending or unexpected emergencies, falling behind on your monthly dues is a nightmare. However, borrowers that have been bankrupt can still avail a subprime loan. What matters is that the cause of bankruptcy was not due to a failure to pay a car loan or that it ultimately led to a repossessed vehicle. Subprime car lenders are specifically more concerned on your history of being an on-time payer.
When the debt-to-income ratio is quite high (i.e. more than 50%) a lender might not offer a prime rate because of the high debt-to-income ratio. This ratio is calculated by comparing a prospective borrower’s total debt to its present income. So if a borrower has a high ratio, then the lender might offer a subprime rate.
Having employment history issues can classify a borrower as subprime. Even if you don’t have any history of late or outstanding payments, an unstable job history can drag you down to a subprime rate. A stable job history of at least two years is vital if you want to apply for a prime loan.
As mentioned above, subprime lending also happens to home mortgages, credit card lending and auto loans. In the case of subprime mortgages, it poses a lesser risk to the lender because the house acts as a collateral. And take note that home values are always increasing. This protects the lender or bank from losses brought about by a repossession or bankruptcy. However, a subprime auto loan is different. Although the car can still be used as a collateral, its value depreciates over time thus posing a greater risk for lenders or banks.
If your credit history prevents you from getting a prime loan, availing a subprime loan can help you with your transportation needs. What’s important is sticking to your budget and creating a payment plan that is most suitable for you.
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