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Subprime Credit 101

Updated: Oct 23, 2014

Highlights

  • Subprime loans are offered to people with 600 or less credit scores.
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Subprime Credit: What is it what it means.

Credit scores range range from 300 to 800, with 800 being a very high (positive) score and 300 a very low (negative) score. 620 means that you are 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 subprime loans have high interest rates, added fees, and other costly expenses. Typically subprime loans are adjustable loans that have a low “teaser” introductory interest rate. However, this introductory rate is only good for the first 3 to 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. In the early 2000s, mortgage interest rates were low and just about everyone thought they could finally afford a mortgage loan. However, those with subprime credit could not 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 does not mean you are going to get taken advantage of when it comes time to purchasing a home. It just means your credit is not the best. What you need to do is:

  1. Improve Your Credit The higher your credit score, the better your chances of qualifying for a loan with low 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 to find an honest lender

How to Improve Your Subprime Credit Loan

If you have an adjustable loan and you know it is about to jump, look into refinancing. Consider refinancing your adjustable loan with a fixed-rate loan. Even if the fixed-rate loan has a higher interest rate than what you are currently paying, it will most likely still be lower than when your adjustable loan resets.

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