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What is a Subprime Loan?

By Garry Crystal
Updated May 16, 2024
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If you cannot qualify for loans or are having difficulty obtaining credit through the normal channel, then a subprime loan may be your next port of call. A subprime loan is a loan that is often offered to who is not a "prime" lending candidate, such as someone 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 standard loan from a bank.

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.

Finally, remember to get a copy of your credit rating before you apply for your loan. There may be some items or errors you can clean up before applying for a loan. A small improvement in your credit score could translate to a savings of thousands of dollars in interest on your subprime loan.

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Discussion Comments

By anon138344 — On Dec 31, 2010

the word SUBprime is misleading. Sub = below

Below prime -- not really. Loan sharking would fit. Incorrect use of words appears to be a great way to lie to the public or make them feel good about something that is fraudulent.

By anon21821 — On Nov 22, 2008

i am a widow with a 10yr old daughter, we both get survivor benefits from s.s., we live in a small town with not many job opportunities, im stressing about having money to buy her christmas! s.s. is paying bills but not much left for extras, before my husband died we had some financial problems due to his injury, so my credit does not look good at all. how can i get a loan or credit card to help me get through christmas, i am diligently trying to find a job, i have medical billing/hospital work experience, just can't find any opened positions, im afraid i am running out of time.

By Bobbiallen — On Jan 08, 2008

my daughter is walking away from her home which was a subprime loan because it went to almost double her payment and the value of the home went down. what happens after the home goes to auction? and what happens to her besides her credit goes down hill? can she work without her paycheck getting attached by the government and does she owe the irs any money for defaulting?

By anon5859 — On Dec 08, 2007

I am glad to bump into this site. This is a great informative avenue for anyone.

I heard so much about subprime lenders being in trouble, but never really understood how they were different from your known lenders as WAMU, BOA, Countrywide,etc. Now I understand! I will recommend this site to my frinds.

By Leo123 — On Nov 26, 2007

Tribute lending group is a scam they will probably tell you that you need to send more money because you have bad credit. We sent them money and we never heard from them again. They do not reply to any e-mail that you send them. They now have 4 complaints against them check with the better business bureau. We filed a complaint against them with the better business bureau and they did not reply to the complaint. By the way, according to the federal trade commission it is unusual to ask for money up front for a loan and it is illegal.

By lamaestra — On Oct 03, 2007

I am not a banking or finance expert, but I have never heard of this procedure being done by a reputable bank. I would do some more research on this before you accept the loan!

By anon4103 — On Oct 03, 2007

I was recently contacted regarding a loan request and was approved but told I need to make a security deposit of $850 equal to 6mo of payments. Is this a normal procedure? Have you heard of Tribute Lending Group? I checked with BBB and they have no complaints filed.

By brenjon56 — On Sep 05, 2007

I was going to close on my refinancing and the mortgage company last minute said my debt ratio was to high, because my car was in the credit report and it was in the report when i originally applied for the loan. This caused me extra expenses and not able to close on my refinance. Where can I turn to to get my loan qualified and what can I do this company caused me out of pocket expenses and I'm in a bind now? My credit score stands at 480 and the only problem was the debt ratio.

By anon3478 — On Aug 31, 2007

how subprime loan does affect stock prices? more precisely what the role subprime loan did play in recent slump of share prices?

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