Subprime Lending: What is it and How Does it Work?
Subprime lending is a loan issued to lenders with a poor profile. This could be a result of bad credit, the individual being new to borrowing and having no established loan history or currently not having a consistent income. To paint a clearer picture of what a subprime lender looks like, a credit score between 550 and 620 is considered to be in subprime range.
Due to the above information, subprime loans carry a higher risk than prime loans, which means higher interest rates than the prime rate; however, not all lenders view a borrower’s risk the same way. This means by exploring different lenders, the borrower can achieve a better interest rate on their loan.
Benefits of Subprime Loans
A major benefit to subprime lending is ease of approval. In some cases, people need loans; however, their poor credit scores make receiving a loan highly challenging. Subprime loans enable people, who would otherwise not qualify for a loan, to receive those much-needed loans. For example, let’s say you need a new vehicle to commute to work; however, your poor credit score is preventing you from getting an auto loan. Exploring a subprime loan could allow you to receive the necessary financing to meet your automotive needs.
Cons of Subprime Loans
Since lenders are taking a higher risk with subprime borrowers, these loans come with higher interest rates. Also, although the lenders are more flexible with credit score, they’re very firm on the examination of a borrower’s income. Ensuring that the borrower has a steady stream of income that enables them to make the minimum monthly payments is a must or else they won’t be able to make the payments.
Subprime loans can take numerous different shapes such as auto loans, credit cards, unsecured personal loans and even student loans. At Gozigo, we focus on auto loans and utilize our specialized network of lenders to allow customers to receive the best loan for their personal situation.