About Sub Prime Lending

A sub-prime loan generally denotes a loan that has a higher interest rate than a prime rate loan. Sub-prime loans are meant and useful for people with poor or limited credit history. The reason behind attaching a higher interest rate is to cover the high risks involved in lending to prospective sub-prime borrowers.

Not all the lenders present themselves as sub-prime lenders. It is the high rate of interest that differentiates sub-prime lenders from others. If your credit history or ability allows you to have a prime loan, simply avoid sub-prime loans and lenders.

A borrower who has a low credit score and thus fails to qualify to get a prime loan usually becomes a potential sub-prime borrower. The credit score used to ascertain this is also known as a FICO Score. With some additional factors taken into consideration, a person with a mid-range FICO Score qualifies for a sub-prime loan. Factors which are taken into account usually include proposed down payment, ability to document the income quoted and the amount of debt of the applicant. It may so happen that some of the borrowers are unable to document their income like those who are self-employed. These borrowers have an option to apply for stated income loan where they simply (and honestly) state their income on the application form. Due to the fact that these stated incomes are unverifiable, a higher interest rate is charged with the sub-prime loans granted to the borrowers of this category. Read more »

Originally posted 2009-08-16 01:27:16.