Advantages and disadvantages of lenders and subprime loans
A subprime loan is primarily a type of loan offered to borrowers who are not eligible for conventional loans and are considered to be high risk due to various factors such as low income, large outstanding debt, and low credit rating.
These loans can also be called bad credit loans because they are the same; that is, they are only offered to people with increased risk factors.
What is a subprime loan?
Subprime loans are your type of loan which is usually offered to people with increased risk factors such as limited credit history, low income, low credit rating, etc.
Unlike a conventional loan, subprime loans have high interest rates. Technically, most of these loans have a subprime loan counterpart, including mortgages, auto loans, personal loans, etc. time to obtain approval for a conventional loan. And this is where subprime loans come into the conversation.
Of course, the approval of a loan depends on several factors. But, the most important part of getting a conventional loan approved is a satisfactory credit score, which some people don’t have. If you are just starting to build your credit, it could be at a disadvantage for you as you will have a hard time getting approved for conventional loans.
Having said that, subprime loans were created to help people with bad credit acquire a house, car, financial aid, etc. These loans have different characteristics which vary from lender to lender. However, most subprime mortgages have two common traits: higher interest rates and high closing costs.
Types of subprime loans
If you have done your research on subprime loans, you can see that each subprime loan varies from lender to lender. But in reality, there are three main types of subprime loans.
Real estate loans at risk
Mortgages, in reality, can be classified into two main groups, mainly subprime mortgages and subprime mortgages. The prime home loans are what you call conventional home loans which are the ones you commonly see in the market. Subprime home loans are just prime home loans that have a slightly higher interest rate in simpler terms.
Subprime mortgages can be classified into three main groups: variable rate mortgages, fixed interest mortgages and interest only mortgages. Typically, subprime mortgages are only granted to people with a credit score of less than 650.
Subprime auto loans
Just like with subprime home loans, subprime auto loans are just your conventional auto loans, but with a higher interest rate. However, nowadays it is more difficult to get approval for a subprime auto loan because lenders are more strict in ensuring that the borrower will not default on the loan.
To combat this uncertainty, most lenders today offer subprime loans with longer repayment periods to ensure that the borrower will pay them back. Some lenders have a period of 69 months and others up to 84 months.
Subprime personal loans
Personal loans are generally unsecured, which means that they do not require any collateral, which makes it risky for lenders to offer subprime personal loans for obvious reasons. You might as well go for secured loans to have a lower interest rate instead.
Benefits of subprime loans
Subprime loans generally have a bad image because of their higher interest rates. But they are not that bad because they also have some advantages. The most obvious advantage of subprime loans is that it is easier for people to qualify for a subprime loan even if they have a bad credit rating or little credit history. This means that it will be more practical for people to build credit if they are just getting started.
Since you can use a subprime personal loan, it will also be easier for people with bad credit to consolidate their debts, thereby improving their credit score. It will also make their payments easier and manage their finances better. Subprime loans can also allow people who are just starting to build up their credit to become owners or buy a vehicle when they could not opt for conventional loans.
Disadvantages of subprime loans
Since subprime loans carry huge risks for lenders, they counteract this by giving them higher interest rates. And the resulting scenario is the person who defaults on the loan because they cannot pay the interest.
Not only that, but subprime loans also come with a lot of fees like processing fees, closing costs, upfront fees etc. These can add to your debt, which can be a real burden if you are on a budget.
To take with
Subprime loans are not to be taken lightly if you don’t know what you are getting into. Before applying, make sure you have exhausted all your options for obtaining a conventional loan. Also, do your research first before taking out a subprime loan. Balance its pros and cons and make sure that you don’t suffer a huge loss in return. Finally, subprime loans should be taken as a last resort and not as a first choice.