What is a subprime loan?

If you cannot qualify for a loan or have difficulty obtaining credit through the normal channels, then a subprime loan may be your next port of call. A subprime loan is a loan often offered that is not a prime loan candidate as a person with a bad credit record.

The interest rate on a subprime loan is likely to be much higher than an interest rate you would expect from a standard bank loan.

The interest rate on a subprime loan is likely to be much higher than an interest rate you would expect from a standard bank loan.

Many people will use a subprime loan when they cannot get credit to help repair their credit rating. There can be many reasons why a person would fall behind on their credit payments. An unexpected loss of job, illness or just bad debt management can start a downward spiral of delayed debt repayments. Once a couple of payments have been exceeded, interest may start escalating at a frightening pace.

Once you have a bad credit history, you may find it difficult to open new accounts, get credit or be accepted for a mortgage. Subprime loan lender will take into account how serious the bad credit history is. From credit rating he will calculate the interest amount, depending on how good or bad a risk borrower is.

A very important factor for the borrower when considering a subprime loan is to remember not to take the first loan offered. Shop around and get the best deal you can. There are lots of reputable loan companies out there willing to offer a subprime loan. To offset the good companies there are also bad ones who want the milk interest rate to the extreme.

There is also a level of negotiation available when considering a subprime loan. Lenders of this type of loan usually finance the loan through a third party so that loan rules are a little more flexible. Try and negotiate if you can, for the best interest rate.

Also consider the repayment time horizon you want to repay the loan in. This type of loan is good for repairing credit registers, but you may not want to repay the loan over a long period of time. You might take a loan over 5 years and then circumstances can change and you can pay it back faster. If you think this might be the case, ask what the lenders early repayment rule is.

Finally, remember to get a copy of your credit rating before applying for your loan. There may be some elements and errors you can clean up before applying for a loan. A slight improvement in your credit score can translate into a saving of thousands of dollars in interest on your subprime loan.