Subprime Credit

Your 101 Guide to Subprime Credit and What it Means

Subprime credit – what is it and what does it mean? The credit score range is 300 to 800, 800 being a very high (positive) score and (300) a very low (negative) score. 620 means that you’re credit is not solid enough to qualify for a prime loan. It is possible for someone with a credit score lower than 620 to qualify for a prime loan, as lenders do take everything into consideration. However a score lower than 620 does make it harder to qualify.

Types of Subprime Credit Loans
Most loans you can get with subprime credit have high interest rates, added fees, and other costly expenses. Typically subprime loans are adjustable loans that have a “teaser”/”introductory interest rate that’s significantly low. However, this introductory rate is only good for the first 3-5 years. After the introductory period, the interest rate increases to the current prime rate plus 5% -- or more. This can drastically increase mortgage payments for borrowers. This is exactly why the subprime market is currently in trouble. About 5 years ago mortgage interest rates were low and just about everyone thought they could finally afford a mortgage loan. However, those with subprime credit couldn’t qualify for a prime, fixed loan. As a result, they were at the mercy of lenders willing to give them subprime loans.

What to Do if You have Subprime Credit
Just because you have subprime credit doesn’t mean you’re going to get taken advantage of when it comes time to purchasing a home. It just means your credit isn’t the best. What you need to do is:

1) Improve Your Credit: the better your credit score, the better your chances are of qualifying for a loan with better terms. To improve your subprime credit, pay off your debt and get your finances in order. Then, start building credit. Pay all your payments on time. Avoid late payments and defaults.

2) Be Careful When Shopping for a Subprime Loan: not all subprime loans are bad. You just need to watch for predatory lenders who might take advantage of your situation. To do this, you need to:

Read all paperwork (don’t sign anything until you understand everything)
Don’t sign documents with empty lines (write NA in them)
Shop around (you might just find an honest lender)

What you Can do to Improve Your Subprime Credit Loan
If you have an adjust loan and you know it’s about to jump, look into refinancing. What you want to do is refinance your adjustable loan with a fixed loan. Even if the fixed loan has a higher interest rate than what you’re currently paying, it will most likely still be lower than when your adjustable loan jumps up.