What is a Subprime Loan?

For those with a poor credit score or a lack of credit history, getting access to necessary funding may seem out of reach. Many lenders, credit unions and banks refuse to work with borrowers that carry a higher risk of defaulting on a loan. However, some lenders are willing to take on the additional risk by offering what is known as subprime loans.

In some instances, subprime loans may be the only viable option to gain access to necessary funds. However, these loans carry additional risks not just for the lender but for the borrower as well. The housing crash of 2008 that caused many to lose their homes was a result of aggressive subprime lending. Loans were being written for individuals who were at too high of a risk of not being able to keep up with their payments.

While a large part of the responsibility for the 2008 crash falls on the lenders, some also fall on the borrowers. If you’re considering taking advantage of a subprime loan, make sure you fully understand the pros and cons of what you’re signing up for. Just because a loan is offered to you does not necessarily mean it’s a good fit or a fiscally responsible move.

Check Your Personal Loan Rates

Answer a few questions to see which personal loans you pre-qualify for. The process is quick and easy, and it will not impact your credit score.

What is a subprime loan?

A subprime loan is an agreement to borrow money that has unfavorable terms for the borrower, typically referring to a much higher than usual interest rate. When banks and financial institutions lend money to other banks and financial institutions, they do so at what is known as the prime rate. This interest rate or cost of borrowing is regulated and set by the Federal Reserve Bank.

When banks or financial institutions turn around and lend this money to you, they tack on additional interest so they can turn a profit. Typically, the interest rate you end up paying is very close to, and just above, the prime rate.

However, this is not the case with subprime loans. Instead, the rate you receive is much higher. Banks and financial institutions do this to lock in higher profits in response to the greater risk they are taking on with the loan. While some regard this as predatory lending, others see it as a necessary step allowing more people to have access to borrowed money.

The effect of subprime loans on borrowers is more cost. Over the life of your loan, you will end up paying significantly more than a borrower utilizing a more traditional loan with lower rates. This is certainly not ideal, but it may be the only way you can secure a loan.

Recommended subprime lenders

For those looking to utilize a subprime loan, there are plenty of high-quality options out there for you to choose from. As subprime loans are fairly unique, each lender’s terms, rates, amounts and requirements for approval may vary greatly.

Personalloans.com

Personalloans.com offers subprime loans to borrowers looking for between $1,000 and $35,000. Loans from the company range from 90 days to 72 months and carry no prepayment penalty. The APR will depend on your credit score, repayment history and a few other factors the company deems important.

While the company does not denote a minimum credit score it is willing to work with, there are examples of loans given for borrowers with credit scores as low as 300. No matter how low your score, Personalloans.com may be able to help you get access to the funds you need. Be aware, though, based on how subprime loans work and the examples this company gives, you will pay more with a lower score.

Cash USA

Those looking for a subprime loan from $500 to $10,000 may want to check out Cash USA as an option for lender marketplaces. The company offers to connect borrowers to lenders with rates between 5.99% and 35.99% with terms between 90 days and 72 months. What’s nice about Cash USA is that you can get approval in minutes with several different lenders.

To get approval for a loan through Cash USA, you must be at least 18 years of age, a U.S. citizen, earn at least $1,000 a month after taxes, have a checking account in your name and be able to provide work and home phone numbers. Specific credit score requirements are not disclosed

Carrington Mortgage Services

The Carrington Flexible Advantage loan is Carrington’s home loan solution for those with poor credit. The company states it’s willing to work with borrowers with credit scores as low as 500. Loans are available up to an impressive $2 million and can be used for home purchases, refinances and cash out options. Be aware cash-out loans are only available up to $750,000, which is still impressively high.

It’s also important to note that Carrington Mortgage Services claims it’s willing to work with borrowers that have had a recent major credit event like bankruptcy, foreclosure, short sale or late payments. As you might expect, there are some limits here that deal with the severity of the issue and how long ago it occurred.

Check Your Personal Loan Rates

Answer a few questions to see which personal loans you pre-qualify for. The process is quick and easy, and it will not impact your credit score.

The bottom line

While taking out a subprime loan is not ideal, it may be your only option to get access to the funds you need for an upcoming purchase. Due to the elevated risks and costs of these loans, make sure you completely understand all aspects of what you are signing up for. The money you are borrowing will be more expensive, which may mean longer terms or higher payments throughout the life of your loan. Ultimately, you’ll need to make the decision on whether or not to use a subprime loan based on your unique situation.

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Jason Wesley
Jason Wesley
Contributing Writer

Jason Wesley is a seasoned copywriter with a passion for writing about banking, tech, personal growth, and personal finance.As a business owner, relationship strategist, and officer in the U.S. military, Jason enjoys sharing his unique knowledge base and skill set with the rest of the world.