When a person has a low credit score, and needs funding, they may think they don’t have options. A subprime score is a credit score that is considered low (anything under six hundred and twenty) and may make it difficult to get traditional funding, which factors in credit scores for eligibility. However there are types of loans and financing a person can get with a subprime score. Subprime loans/ subprime financing are a type of lending that is available for those who have lower credit. However, before signing up for these types of loans it is important to understand the characteristics that make up subprime loans and the ins- and-outs of the process of this type of lending.
The Different Types of Loans/ Financing Available For Those with Subprime Scores
There are many forms of loans and financing available for subprime scores, here are a few types to look out for:
- Home Equity Lines of Credit/Loans- This is a good loan for those who own a home and don’t have the best credit. These loans take the equity that a home has and offers it as collateral for borrowing.
- Credit Union Loans- It may be easier to get a loan from a credit union than a bank if a person has a subprime score. This because credit unions offer much more flexibility with lending and requirements.
- Car Title Loans– These loans are where the borrower’s car is put down as collateral. Often time these lenders do not need to check credit because the security of the loan comes from a vehicle.
- Bad Credit Loans– These are types of loans that are offered by many lenders- simply made for those with subprime credit to be able to borrow money.
If Subprime Lenders Do Not Look At Credit Scores What Do They Consider?
Subprime lending may be considered risky for lenders, as they are working with those who may not have the best history with borrowing and finances in general. Therefore even though lenders will not look at credit they do have to closely examine other financial aspects of their potential borrower. There are a few factors other than a credit score that subprime lenders will look at, here are a few of those factors:
· The Borrower’s Income
This is a huge factor that subprime loan lenders will consider. Lenders will ask for some proof of income- via bank statements, paystubs, letters of income (this is for sources of income that are non- traditional) etc. Lenders will examine both monthly and annual income. Keep in mind that non-traditional income such as social security may also be considered as income.
· Ability to Repay the Loan
Once lenders look at the borrower’s income, lenders may ask and factor in any monthly expenses that a borrower has. This includes things like credit card debt, rent, payments for any existing loans etc. Once a lender factors in all this they can then figure out an amount and repayment terms that will work for that specific borrower. The lenders main goal here is to figure out what amount they want to give out without burdening a potential borrower.
· Any Type of Security in the Loan
This security of a subprime loan comes from a tangible object that holds value and is owned by the borrower. If the loan is not paid back the lenders get to keep whatever object that was put up as collateral against the loan. The object depends on the type of loan being given out, and the lender being worked with. Generally the amount of the loan will reflect the value of whatever item is offered towards the loan.
· The Availability of a Cosigner
Having a cosigner for subprime loans (or really any other type of loan) may increase chances for eligibility and may even increase the amount that a lender wants to give out. Cosigners can be anyone a borrower knows- who has good credit- and is willing to take on the responsibility of paying back the loan, if the initial borrower is unable to.
So when it comes to subprime loans or financing, just because lenders do not look at credit it does not mean that they will not pay attention to other financial aspects that a borrower carries. Bottom line is that a lender is potentially doing business with whoever applies for financing, and so they need to make sure that they won’t be losing money.
Things to look out for With Subprime Loans and Financing
When it comes to subprime lending the interest rates on them can be extremely high– especially when compared to traditional types of lending. The interest rate on subprime lending can generally range anywhere from fifty to three hundred percent of the principal amount. In some states some subprime loans have no caps on the amount of interest a lender can charge.
So before signing a contract it is important that the borrower pays attention to the interest of a loan in terms of the APR (Annual Percentage Rate) and the MPR (Monthly Percentage Rate) – these are the interest in terms of the yearly and monthly percentage, respectively. Keep in mind that most lenders will only show their borrower’s interest in terms of the MPR (as the APR may seem extremely high) so as a borrower it is important to do some calculations on your own. Additionally it is important to find a fair/reputable lender.
If a person with subprime scores (poor credit) it looking for a way to borrow money they have many options that exists for them. Loans that do not factor in credit for eligibility are called subprime loans. Subprime loan lenders will factor in other financial aspects of a potential borrower such as income, and ability to repay the loan to then determine eligibility. Before signing up for any type of subprime loan it is important to look at the amount of interest being charged.