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What Is A Subprime Loan ?
A subprime loan is a loan for that segment of customers who are not eligible for prime loans. Their ineligibility for prime loans is primarily because of a poor credit score, making them a riskier segment of consumers. |
It can also be due to the customer’s credit history suggesting likely defaulting of re- payments or a history of bankruptcy.The interest rate on subprime loans is much higher than that on prime loans because of the high risk profile of the borrower. The higher interest rate often results in the borrower paying thousands of dollars more during the tenure of the loan. However, the interest rate offered by lenders is not standardized. It depends on their assessment of the borrower’s risk. So, it is always a good idea to shop around when applying for a subprime loan.
In addition to customers with poor credit ratings, subprime loans are a boon for emigrants, women, minorities and those people with low income and also those companies that have gone bankrupt in the past. Another segment of consumers that can benefit from subprime lending are the credit card holders who have taken a huge credit on their credit cards. They can avail a subprime loan to clear off credit card debts, since the interest rate on subprime loans is lower compared to the rate charged by credit cards.
These subprime loans are easier to obtain than the traditional loans. The subprime lending is usually availed for home loans. However, this form of lending is also available for purchasing cars.
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