Getting a loan is sometimes a necessity that we have no option but do. Occasionally, our financial needs need to be addressed this way all because we don’t have the financial capability to do it on our own. Taking out loans is always something that should be well-thought-out, especially by those who usually find trouble paying them back.
Here’s the thing, though. Lenders don’t want to risk their money on people with a low credit score or likely to neglect their loans. Lending is still a business after all, and these people are tasked with lower risk as much as they can when choosing which application should be approved. Those with excellent scores get a chance to have money lent to them.
So what happens to those who have poor scores or unappealing credit history? Will they still be able to borrow money from financial institutions? If so, how? The answer is, yes, they can still borrow money, but it comes with a catch.
What are Subprime Loans?
When a person has a poor credit score, or has records of defaulting on their loans, being approved for a standard loan with a standard rate can be difficult. That is why most of these people choose to apply for subprime loans.
A subprime loan is a type of loan that offers a rate higher than the prime rate to individuals with these qualifications. These types of borrowers will find difficulty in applying for loans from traditional lenders since they usually are rejected due to being high-risk.
Subprime loans have different names, such as near-prime, subpar, non-prime, and second-chance lending. It has a higher interest rate than the prime rate. A prime rate is the interest rate banks give to their customers who are creditworthy and responsible for paying off their loans. As of 2019, the prime rate went as low as 5.50%.
Almost all existing loan plans have a subprime loan version. You can as besured that there is a subprime personal loan, subprime mortgage, subprime auto loan, and even subprime student loans. As long as there are people who are considered too risky to qualify for prime rate loans, the subprime loan will be there to catch them.
Types of Subprime Loans
Here are the types of loans you should know about:
Adjustable-Rate Loans, mostly referred to as Adjustable Rate Mortgage, is a type of subprime loan whose rate can change after years. It starts with an interest rate that stays flat, but will soon turn into a floating rate. The change can be either gradual or sudden. It’s a type of loan that encourages borrowers to pay their credits faster, thus improving their credit score.
An Interest-only Loan is a type of Adjustable Rate Loan that lets the debtor only pay back the interest of the loan for the first few years. This type of payment adheres to the Libor rate, rising and falling with it. The interest starts as a low ‘teaser’ rate, and usually last for three to five years. After that, it converts to a conventional loan/mortgage, and the interest rate will increase with it.
A Fixed-Rate loan is a type of subprime loan where the interest doesn’t change during the period of the loan. This can help debtors predict their monthly payment since the interest rate is decided during the application process. Lenders will be the one who decides how much interest rate a debtor will get and how long they have to pay it back.
So, Should You Apply for a Subprime Loan?
You might be currently hesitating on whether or not you should apply for credit loans. After all, you wouldn’t be reading this article if you are sure of what you are doing. Subprime loans have a bad rap due to the name given to it.
However, if you’re someone who qualifies for a subprime loan, where there’s no possibility for you to apply for a loan with prime rates, then I’d say go for it. With subprime loans, you can afford a house, mortgage, or education despite your poor credit score. You can even use it to consolidate all your debts or help you improve your credit score and report.
It’s important to remember, though, that subprime loans have higher risks for lenders, so this can lead to higher interest rates. Not only that, but subprime loans give you a bigger temptation for defaulting on your loans and can ruin your credit score. Predatory lending is also a major issue, and can deeply hurt you financially, so watch out for them. Additional fees are also prevalent in this type of loan.
Subprime loans can be a great lifesaver to those who cannot apply for standard loans or prime loans. It has advantages that can help a debtor make their credit score and history better, thus giving them a fighting chance to apply for a better loan option. However, its high-interest rates can be challenging to pay off, especially every month. That’s why it’s important to consider your cards before you risk gamble on a loan that can make or break your creditworthiness.