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A subprime personal loan can help you obtain financial help if you’re being denied access to traditional loan products. However, because they are usually tailored to low credit borrowers, the drawback is that they often come with high interest rates and fees. Nevertheless, they often provide a financial solution where there once was none.
What Are Subprime Loans?Subprime loans are distributed to borrowers who have any of the characteristics below:
A subprime loan is essentially a loan option for borrowers who have trouble getting loans through a traditional route. Many different types of loans offer subprime options — such as personal loans and auto loans. While subprime loans are more expensive than other loans, they do serve a few purposes:
- Poor credit.
- Low income.
- Zero or limited credit history.
- Less than ideal collateral.
- They provide borrowers access to needed funds.
- They help borrowers who have no credit or poor credit the opportunity to build a stronger credit history with financial institutions.
What Is a Subprime Credit Score?What constitutes a bad credit score? It depends on the credit score calculation used. FICO® Scores calculate a subprime credit score as anything between 580 and 669. Meanwhile, VantageScore® considers subprime to be any score between 300 and 600.
Can Subprime Loans Impact Your Credit Score?Applying for and getting a subprime loan doesn’t hurt your credit score any more than the average loan. As far as your credit score is concerned, there is nothing different about a subprime loan versus a prime-rate loan. Your score is affected the same way either way.Any time a lender runs a hard credit check during a loan application, your credit score is hurt a few points. But if you make all payments on time and are otherwise responsible with your finances, your credit score will likely improve. The largest contributor to a person’s FICO Scores credit score is their payment history. It accounts for 35% of a person’s total score, and is why making your payments on time is so important. Paying down your loan will gradually lower your amounts owed (which accounts for 30% of your FICO credit score). Over time, a subprime borrower may be more likely to qualify for a prime-rate loan, as long as they have paid their bills on time and paid down their debt.
How Do Subprime Loans Work?Many lenders offer subprime loans — they’re not unusual. You can get a subprime mortgage, auto loan, or even a subprime personal loan. Shopping for subprime loans is simple. Use a loan broker platform and enter your credit score, zip code, and how much you want to borrow. From there, you’ll receive a list of lenders who are willing to work with borrowers who have a similar credit portfolio. Once you formally apply, you’ll be given more specific loan terms. From there, compare personal loan rates and repayment periods. You may even want to make a subprime personal loan lenders list of all your favorites.Depending on which type of loan you need, you may be required to put down a large down payment. For example, if you need a subprime auto loan, subprime borrowers typically need to put down a larger percentage of the purchase price than borrowers with good credit.Once you’ve been approved for the loan, the repayment process is the same as any other loan product, but you will be paying more than someone who borrowed the same amount but has better credit. With subprime loans, origination fees and interest are usually higher than a standard loan. You may also have a longer repayment period, which has its own set of benefits and drawbacks. Generally speaking, a longer repayment period lowers your monthly payment, but it also increases the overall cost of the loan because interest accrues over a longer period of time. Keep in mind that subprime can mean different things to different lenders. Your credit score isn’t the only thing that may cause a lender to think of you as a subprime borrower. Other contributing factors include your income and collateral.
Types of Subprime LoansThere are a few different types of subprime personal loans, each having its advantages and disadvantages.
Interest-Only Subprime LoansAt the beginning of an interest-only subprime loan, your payments are only going toward interest. Therefore, while your monthly payments are small, you’re not actually paying down the loan because you're essentially just paying lender fees. When you’ve finished paying off the interest, all payments go towards the loan’s principal. Unfortunately, the monthly payment amount increases once this shift occurs.
Fixed-Rate Subprime LoanWith a fixed-rate subprime loan, the interest is the same throughout the life of the loan, which means your monthly payments are always the same. The downside to this is that the repayment period can be as long as thirty or more years. While this lowers the monthly payment amount, it increases the amount you’ll pay in interest over the life of the loan.
Adjustable-Rate Subprime LoanFor the initial duration of an adjustable-rate subprime loan, interest rates remain fixed. However, rates become variable after the initial fixed-rate period. Consequently, your monthly payments can change as the market fluctuates, which means you don’t know in the beginning how much you’ll actually pay for the loan. The frequency of payment amount changes depends on the type of loan you choose. Adjustable-rate loans can change every month, quarter, year, three years, or even five years, depending on how the loan is structured.
Dignity Subprime LoanDignity subprime loans require borrowers to put down 10% of the loan amount in order to qualify. The borrower must agree to higher interest rates during the initial repayment period, after which the interest rate lowers to a prime rate if the borrower has made regular, timely payments.For comparison, here is a breakdown of the pros and cons of each subprime loan type:
|Interest-only subprime||Early payments are more affordable.||Once the interest is paid, monthly payment amounts increase dramatically|
|Fixed-rate subprime||Interest amounts stay the same throughout the life of the loan.
Monthly payments stay the same.
Monthly payments are more affordable for many borrowers.||Longer repayment periods mean borrowers pay more overall.|
|Adjustable-rate subprime||Interest rates stay the same for the first part of the repayment period.||Interest rates vary after the introductory period, which can make budgeting difficult.|
Pros and Cons of Subprime LoansKnowing the positives and negatives about subprime loans will help you make a smart financial decision.With some financial care, someone who qualifies only for a subprime loan may be able to improve their financial situation, enhance their credit history, boost their credit score, and qualify for a prime-rate loan in the future.
|Pros of Subprime Loans||Cons of Subprime Loans|
|May improve credit score and credit history over time.||Because of high interest rates, the overall cost of subprime loans is higher than prime-rate loans.|
|Provides funding for borrowers that are unable to qualify for other loan products.||Income requirements of lenders can be more difficult because the monthly payments are higher than average.|
Top 3 Subprime LoansJust as there are many personal loan types, there are many subprime personal loan direct lenders. To choose the best, we looked at interest rates, maximum loan amounts, repayment periods, and online ratings.
- Annual percentage rate (APR) range of 5.94% to 35.97%.
- Maximum repayment period of five years.
- Strong online rating of 4.5 out of 5 stars.
- Maximum loan amount of $50,000.
- Origination fee between 2.9% and 8%.
- APR range of 7.04% to 35.89%.
- Fixed monthly payments with no prepayment penalties.
- Maximum loan amount of $40,000.
- Origination fee can range between 3% and 6%.
- APR range of 4.99% to 35.99%.
- Receive a deposit in as little as one day.
- Maximum loan amount of $50,000.
- Five-star online review.
- Low origination fee range of 0.99% to 5.99%.
- Lowest minimum loan amount is $2,000.
Getting a Subprime LoanStep 1: Look up your credit score. Many banks offer their account holders free updates on their credit score. Step 2: Determine how much you need. Many subprime lenders have specific ranges of loan amounts. Knowing what you need will determine which lenders may be willing to work with you. Step 3: Calculate your annual income. Lenders typically want to know your pre-tax (or gross) income. Use tax returns and pay stubs to calculate how much you make.Step 4: Gather the appropriate documentation and information. You may be asked for the following:
Step 5: Apply online. A loan broker can speed up the application and rate comparison process by only requiring one application. Step 6: Compare rates and loan terms. When comparing loan products, look at the following information provided by each lender:Step 7: Choose the lender offering the best loan product for your specific financial needs. By comparing the above loan terms, choose the loan that fits within your budget the best. Don’t just look at interest, but also pay close attention to fees, such as the loan origination fee. For example, one company may offer a slightly lower APR, but when you take into account the loan origination fee, it actually becomes more expensive than other options.
- Government-issued ID.
- Tax returns.
- Pay stubs.
- Social Security number.
- Employer name.
- Start date of current job.
- Amount of recurring debts.
Alternatives to Subprime Personal LoansKnowing when to consider personal loans is sometimes half the battle. When it doesn’t feel right, consider the following alternatives:
Improving Your Credit Score Though this is not a quick and easy fix, one alternative to considering a subprime loan is to wait until your credit score is strong enough to qualify for a prime-rate loan. Of course, it’s not difficult learning how to improve your credit score, but it can take time, which is why subprime loans are relatively common forms of financing.
Getting a CosignerCosigning on a personal loan can dramatically improve your chances of getting a prime-rate loan if your cosigner has a strong income and credit score. The downside, however, is that if you miss payments, both of your credit scores will be hurt because both of your names are on the loan.
Borrowing From Friends and FamilySometimes a loan from a formal financial institution is not the answer. Asking a friend or family member for a loan may be a solid alternative. By signing a promissory note or loan agreement, you can put your lender at ease, knowing you’re serious about paying them back.
Selling AssetsSometimes we overextend ourselves and purchase things that are difficult to afford long term, such as an expensive car. If you have a financial emergency that requires immediate funding, consider selling some of your assets and using the proceeds to fund whatever it is you were considering a loan for.
Pay by CashIf you have the money in savings, but are considering a subprime loan to improve your credit, it may make more sense to pay by cash and take your time improving your credit score by other means. After all, a large portion of your credit score revolves around how much debt you have. If you increase your debt by a significant amount, the benefits of the subprime loan may be marginal.
Home Equity LoanIf you own your home and have accrued enough equity in it, you may be able to qualify for a home equity loan. With this type of loan, any equity you have is used as collateral to secure a second loan.
Compare Personal Loan Lenders With LanternAt Lantern by SoFi, there are many subprime lenders offering personal loans. With a single application, you will receive offers from multiple lenders, making it easy to compare interest rates and loan terms. Whether you are simply looking for a $2,000 loan or a personal loan for an emergency, we can help you find a lending solution. Check your rate at Lantern by SoFi.
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About the Author
Lauren WardLauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.