What Is a Subprime Loan?

What Is a Subprime Loan?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

A subprime loan is a type of loan that is offered to individuals who have a poor credit history or who can’t meet the standard lending requirements. These borrowers are considered high risk due to their financial history. The loan’s interest rates are typically higher to offset the potential risk the lenders take by providing this loan.

Related Questions

1. What are the potential risks of a subprime loan?

Subprime loans come with higher interest rates and fees due to the increased risk lenders are taking. Therefore, they can result in high monthly payments, which could be difficult for the borrower to afford. This could lead to a higher chance of default, which can negatively impact the borrower’s credit score.

2. Why would someone choose a subprime loan?

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People may choose a subprime loan when they don’t have access to traditional forms of credit. Situations such as urgent house repairs, medical bills or other unforeseen expenses might lead someone to take a subprime loan if they cannot access other lending options.

3. Can a subprime loan help improve my credit score?

Yes, responsible repayment of any loan can help improve credit score over time. If you consistently make your loan payments on time, credit bureaus may see this as responsible financial behavior which could reflect positively on your credit report.

4. Can I refinance a subprime loan?

Yes, after a period of consistent, on-time payments, you may be eligible to refinance your subprime loan. Refinancing could potentially lower your interest rates and make the loan more affordable.

5. Are there alternatives to subprime loans?

Yes, there are alternatives to subprime loans. These include loans from credit unions, peer-to-peer lending, or asking a family member or friend for a loan. It’s also possible to work on improving your credit score before applying for a loan.