It’s easy to imagine yourself enjoying the views from your beachfront property while eating a USDA Prime steak. What does “prime” actually mean in relation to a loan? And what is the difference between a subprime and a prime loan? A subprime loan might have a higher interest rate than a prime loan because it is designed for borrowers at greater risk of default.
Although subprime loans are a great option for borrowers with poor credit, they can also be used to finance major purchases such as homes, cars, and vehicles. However, there are some disadvantages to subprime loans that you should be aware of. Knowing the difference between prime and subprime loans will help you make informed decisions about borrowing money.
Prime Loans vs. Subprime loans
Lenders consider factors such as your credit score, credit history, and debt-to income ratio (DTI), when considering your loan application. This is done to assess your creditworthiness and risk level. If you have poor credit or are new to credit, your credit history has shown serious negative events, such as bankruptcy, you might be considered high-risk.
Lenders set loan terms using risk-based pricing. This includes interest rates and fees. Each lender will have its own criteria to assess your creditworthiness. There are many credit scoring models. A FICO(r Score) of 670 to 739 will generally qualify you for loans at competitive rates. However, super prime status allows you to qualify for lower rates if your FICO (r) Score is 740 and above.
Experian defines subprime borrowers generally as those who have a FICO(r), Score of 580-669 or fair credit. Subprime loans offer many of the same loans as prime borrowers, including subprime mortgages and auto loans. Personal loans are also available. However, subprime scores may vary depending on which loan is being taken. These loans are for subprime borrowers so there are key differences.
Higher interest rates: Because subprime borrowers are considered to be a greater risk than prime borrowers, lenders will charge higher interest rates in order to protect themselves.
Higher down payments: Subprime mortgages and car loans will usually require a larger down payment than a prime loan.
Loan amounts may be smaller: Subprime borrowers might not be eligible to borrow as much money as prime borrowers.
Subprime loans have higher fees. Lender fees like origination fees and late payment fees can be much higher.
Shorter repayment terms: Subprime loans are often more difficult to repay than prime loans. A subprime loan for cars might last 60 months, while a prime loan for the same amount may take 36 months. While longer repayment terms reduce monthly payments, they will usually result in higher interest rates over the loan term.
Fixed interest rates are locked for a set period. However, many subprime loans offer adjustable interest rates. The adjustable interest rates are locked for a specific period. They adjust each year which can cause significant increases in monthly payments as well as total interest.
What Does Subprime and Prime Loans Have to Do with Credit?
Your credit score is affected by both prime and subprime loans in the same manner. Both subprime and prime loans can improve your credit score if you pay your loan on time. Your credit score could be affected if you default on any type of loan or miss your loan payments.
Do you want to improve your credit score? How you handle a subprime mortgage loan can make a difference. These steps can make a positive difference to your credit scores.
You must ensure that your payments are properly reported. Ask the lender if they report your account to Experian TransUnion, Equifax, and TransUnion before you apply for subprime loans. This will ensure that your timely payments are recorded on your credit history. This can help improve your credit.
Make sure you pay your loan on time. Set reminders, place the due date on your calendar, or create an automatic payment from you bank account to avoid missing a payment. You should ensure that you have enough money in your account to pay the amount. Your FICO(r Score) is largely determined by the speed of your payments.
If you do miss a payment despite your efforts, don’t panic. Instead, make sure to pay it as soon and as quickly as possible. Credit bureaus won’t report late payments until they are 30 calendar days past due. A payment that is more than 30 days late will not be reported to credit bureaus. However, you might face penalties and be charged a penalty.
How to get a subprime loan
Different lenders have different definitions for subprime borrowers. Your credit score will not give you an exact answer, but it will give a rough idea. You may be eligible for better terms if your credit score is at the top of the subprime range. These steps will help you get the best subprime loan if you are in the solid subprime category.
Research Lenders
Subprime loans can be obtained from credit unions, banks and online lenders. While your bank may be a good place for you to start, it is important to compare loans from different sources. You can also find subprime loan specialists. Credit unions are able to charge subprime loans at a lower rate than other lenders, but not more than 18%. You will need to open an account before you can apply. Do you need a subprime auto loan or personal loan? Experian CreditMatch(tm) is a free tool that will help you find the right lender for you based upon your credit score.