What is a Subprime Personal Loan?

At some point, you may have seen an advertisement trying to get you to apply for a subprime personal loan. You’re not in the minority if you don’t know exactly what this is and how it differs from a prime personal loan. Subprime loans are actually geared more toward people with bad credit rather than people with good credit who can likely qualify for prime loans. Prime and subprime are terms that refer to the interest rates these loans carry. With a subprime loan, your interest rate will be much higher than the current average interest rate that a person with good credit might be able to secure. If you are lucky enough to get approval for a prime personal loan, your interest rate will be right around the current average — not inflated to compensate for a lack of good credit.

I Need Money Desperately! Is a Subprime Personal Loan a Good Idea?

If your credit is bad and you need money urgently, a subprime loan might actually be your best option as long as you do fully understand the terms and have thoroughly read the fine print so you know what you are getting yourself into. However, if there’s any possible way that you can get a prime personal loan, you should do that instead. It’s a good idea to shop around and find out what you can qualify for with various lenders in the event that you might be able to get a more favorable interest rate than what you’re likely to secure through going the subprime route.

I Need to Refinance My House. Can I Do It With a Subprime Loan?

If refinancing your home would save you from foreclosure, you might be able to do that through a subprime loan — particularly if your credit is bad and no other lenders offering lower interest rate loans will go through the refinancing process with you. In fact, the U.S. Department of Housing and Urban Development has reported that most subprime loans are actually taken out for the purpose of home refinancing.

I Would Prefer to Avoid a Subprime Personal Loan. What Are the Steps to Take to Get a Loan Offering Better Interest Rates?

If you can put your money needs on hold for a while and work on building up your credit score, you may be able to bypass subprime loans and get a loan with a good interest rate. You can keep tabs on your score by ordering a free credit report from one or all of the three major credit bureaus – Experian, TransUnion, and EquiFax. You are entitled to a free report once a year. According to MyFICO, you should be able to qualify for most prime loans if your score is around 700. There’s also a chance your score may vary slightly between the three credit bureaus, and you would be better off basing your chances on loan approval going by the lowest score you have.