Applying for financing can be stressful. Whether you’re applying for a car loan, a mortgage or a credit card, it can feel like you’re putting your future in someone else’s hands. When you apply for financing, the offer you receive will be based on your credit score and credit history. If you have a shaky financial background, you may receive an offer with a higher interest rate or other less favorable terms. These offers are sometimes referred to as subprime.
Prime vs. Subprime
If you have a good, very good or excellent credit score of 670 or higher along with a good credit history, you’ll typically receive the best rates from lenders. These are known as prime rates. If your credit score is below 670 and you have delinquencies, a short credit history or other credit issues, you may not receive the best rates from lenders. These are sometimes referred to as subprime or nonprime rates.
If you’re looking for financing, you may want to get your credit score and copies of your credit report. This will give you an idea of what to expect when you apply for financing. You can also shop at multiple lenders if you’re looking for a mortgage or auto loan. As long as you get quotes within a short period of time, typically two weeks, it shouldn’t negatively impact your credit score.
Impact on Mortgages
Nonprime or subprime mortgages tend to have higher interest rates. They may also be adjustable-rate mortgages rather than fixed-rate mortgages. Adjustable-rate mortgages typically have an initial period of time with a fixed rate. After that period of time elapses, the interest rate can change on a regular basis. Subprime lenders may also require a larger down payment, which helps lower their overall risk. Mortgage companies are often willing to work with people with less than stellar credit because the house serves as collateral, which means that if they don’t pay, the lender can take the house.
Impact on Auto Loans
Some auto lenders specialize in subprime lending. According to Business Insider, about 25 percent of all auto loans are subprime. Subprime auto loans can have high interest rates of 10 percent or more. They may also require a higher down payment on the vehicle. Prime auto loans can have much more favorable terms, with interest rates as low as zero percent and no down payment.
Impact on Credit Cards
Subprime credit card companies extend credit to those with fair or poor credit. It’s important to review these credit offers carefully, as they may have a high annual fee along with high interest rates and a low credit limit. If you’re trying to build or rebuild your credit, a secured credit card may be a better choice. Secured credit cards require a deposit, but they may offer better interest rates. Prime credit cards may provide lower interest rates, low or no annual fee and may include perks like reward points or cash rewards.
- Investopedia: Subprime Loan
- CNBC: Subprime Mortgages Make a Comeback – With a New Name and Soaring Demand
- Consumer Financial Protection Bureau: What is a Subprime Mortgage?
- Experian: What Are the Different Credit Scoring Ranges?
- Investopedia: Subprime Borrower
- Bankrate: Adjustable-rate Mortgages: Learn the Basics of ARMs
- Business Insider: Auto Loan Delinquency Rates are Worse Now Than During the Financial Crisis
- Credit Karma: Will Rate Shopping Hurt My Credit Score?
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