What Are Subprime Loans?
In the last ten years, subprime loans from non bank lenders have gained market share for people or companies looking for a loan or mortgage. Often, it can be difficult to qualify for a loan from a regular bank or credit union.
If you can’t qualify due to your credit score, and you still need to borrow money, what should you do? Where else can you find the loan you are looking for? One solution is to contact a subprime lender. Before you do, we think it is important to know your lender. Let’s take a look at subprime loans and subprime B lending companies.
What Does ‘Subprime’ Mean, and Why Does It Matter?
Borrower profiles fall under different categories based on credit score, ranging from having subprime credit (under 670) to super-prime credit (above 800). Subprime profiles are less likely to be accepted for loans and mortgages as compared to super prime profiles, because of the risk factor involved with taking on someone with poor credit.
A lower credit score means that you most likely have had difficulty paying back previous loans or credit card charges. This tells banks and some lenders that you would be a risky borrowing candidate, and that you might not be able to pay back a loan in full.
In many cases, people with a subprime credit score are denied from borrowing money or getting a mortgage. This is where subprime loans come into play.
Subprime Loans and the Businesses That Offer Them
Subprime loans differ from other loans in a few critical ways:
- They are financed by subprime “B” lending companies (also called B-Lenders), who cater to those with poor credit that cannot borrow from most traditional financial institutions.
- Subprime loans are likely to have higher interest rates than other loans. This is because B-lenders assign rates based on the severity of risk it is to take on the particular borrower. This makes sense for the company, because there is a higher chance that these borrowers will not be able to make payments. By charging more interest, they’re compensating for a potential loss.
- Some subprime loans are high interest rate loans, which can have interest rates of up to 60% annually. These are even more difficult to pay off, because it is possible that the interest accumulated will end up costing just as much, if not more, than the original loan.
- They can have short and often customisable repayment terms, maybe only taking a few years or less to repay. Applicants can also choose whether they want to make payments weekly, bi-weekly, or monthly.
- Most require very little personal and banking information, and the application process is quite quick.
These differences make subprime loans seem ideal to those with low credit or any other barrier that might prevent them from getting a loan from a traditional financial institution.
B-lenders saw the difficulties that an increasing portion of the population had with getting approved for loans and mortgages, and used this to their advantage, making subprime lending an option for this group.
Subprime mortgages, or Alternative Lending Mortgages, are a type of subprime loan, used to buy property and are paid off over many years. People with low credit or atypical streams of income may turn to B-lenders that lend out subprime mortgages when an A-lender (traditional institution) denies their application.
These subprime mortgages follow the same trends as other subprime loans:
- Shorter terms
- Interest rates higher by 1-3%
- Less strict qualifications which allows people with less secure income to acquire a mortgage.
What Are the Risks?
The lender isn’t the only one taking a risk in this situation.
When borrowing from a subprime lending company, the high interest rates can make it increasingly difficult to pay back the loan and get out of debt. Some loans have interest rates that could even end up doubling the amount of money that you’ll pay over the course of the loan.
While it may result in more money for the moment, there is a risk that you won’t be able to keep up with your payments, which will only increase your debt and also decrease your credit score.
If you fail to make payments on your loan, you risk a default. Depending on who your lender is, you may be in default after missing one payment, for others it may be a few. This will negatively impact your credit score, which will in turn make it even more difficult to obtain credit in the future. Even if you do, the interest rates will be even higher.
These risks are intensified for those who already have poor finances. The high interest rates, coupled with an established poor financial history can cause people to sink into even more debt as they are trying to get out of it.
This is not to say that people with subprime credit have no lending options. It is just important to emphasize the nature of these loans. Many people can get stuck in a cycle of taking out subprime loans just to repay off other debts, which can spiral into needing to file a bankruptcy or a consumer proposal when the debt gets out of control.
Before opting to take out a loan, make sure to understand both the risks as well as your own financial situation, and how it could impact your finances. If you are unsure of what to do or are already in a bad financial state, we have the tools and the knowledge to help you figure things out.
Contact Us – We Are Here to Help!
Too much debt can create all kinds of problems; from financial, to emotional, to relationships.
At Derek L. Chase & Associates, we offer a free initial assessment where we will analyze your finances and provide you with information on what options are available to you. This appointment is confidential and non judgemental.
Filing a Consumer Proposal or a Bankruptcy in Canada is designed to provide the honest by unfortunate person a fresh financial start. Contact us to set up your appointment today.