What is a Subprime Loan?
If you cannot qualify for loans or are having difficulty obtaining credit through the normal channel, then a subprime loan may be your next port of call. A subprime loan is a loan that is given to people with a bad credit record. The interest rate on a subprime loan is likely to be a lot higher than an interest rate you would expect on a loan from a bank. Many people will use a subprime loan when they cannot get credit to help repair their credit rating. There could be many reasons why a person would fall behind on their credit payments. An unexpected job loss, an illness or just bad debt management can start a downward spiral of late debt payments. Once a few payments have been missed, the interest can start escalating at a frightening rate. Once you have a bad credit history you may find it hard to open new accounts, gain credit or be accepted for a mortgage. The subprime loan lender will take into account how severe the bad credit history is. From the credit rating he will calculate
Thursday, March 8 Posted 1:30 p.m. EST DOWN, BARELY: The average rate on a 30-year fixed fell 1 basis point, to 6.19 percent, in the weekly Bankrate.com survey. That’s a head-scratcher, because other mortgage rate surveys showed bigger declines, and I would have expected a larger drop in our survey, too. In Freddie Mac’s rate survey, the average rate on a 30-year fixed fell 4 basis points, to 6.14 percent. The Mortgage Bankers Association’s average rate fell 12 basis points, to 6.04 percent. I don’t know how the MBA conducts it survey. Bankrate and Freddie use different methodologies. At Bankrate, our benchmark 30-year rate is based on a survey of 100 lenders — it’s the same 100 lenders each week — each Wednesday morning. Freddie surveys many more lenders over the course of a week. The Bankrate and Freddie surveys tend to track pretty closely. The MBA survey tends to be more volatile than the Bankrate and Freddie surveys. Freddie Mac’s chief economist, Frank Nothaft, says rates fell
There is no official definition of what makes a loan subprime or not. One key factor in determining what kind of loan a borrower gets is his or her credit score. Credit scores can run from 300 to 850, and many involved in the business view a credit score of 620 as a historic rough dividing line between borrowers who are unlikely to qualify for a conventional, or prime loan, and those who may be able to. But there is no hard and fast cut off; many people with higher credit scores take subprime loans. In addition, not all adjustable-rate mortgages are subprime. (See related article) Loans with unusual features like these tend to be subprime: • No down payment (or a second loan used to finance the standard 20% down payment, so that the borrower can avoid purchasing private mortgage insurance) • Interest-only loans, teaser-rate loans • Loans where the borrower is allowed to simply assert what his or her income is with little or no documentation • Loans with prepayment penalties that kick i
