Some creditors offer subprime loans to borrowers who have difficulty qualifying for a loan due to poor credit history or have difficulty maintaining a repayment schedule. One of the most common subprime loans is a 'payday loan.' But there are many types of subprime loans that cover most borrowing needs. These include mortgage, vehicle, credit cards, and more.
While a subprime loan may seem like a favorable solution for those who can't seem to qualify for a loan elsewhere, they often come with frighteningly high annual percentage rates (APR) and finance charges that make the total cost of the loan much more than people realize. As a result, these types of loans either have higher monthly payments, which can add financial strain, or they have longer terms, which takes the loan significantly longer to pay off.
Below is real life example of a subprime loan: The amount financed was $4,100 for a 48-month term at a 131.75% APR with a monthly payment of $453.14. If we just multiplied the monthly payment by how many months to pay, we would get $21,750.72. That means after paying off what you borrowed ($4,100) you pay over $17,000 in finance charges.
Ways to Avoid Scary Subprime Loans
More than 1/3 of American consumers fall in the subprime credit category, which lenders typically define as FICO Scores in the low 600's and below. So, if you can wait for a loan, it may be worthwhile to wait until your credit score has improved so that you're likelier to qualify for more favorable rates and terms.
Make sure you're fully aware of the loan's terms, including APR (some loans may start with lower APRs that increase as the loan matures), payoff schedule, and monthly payments.
Contact our Credit Union to see how we can help. We offer a variety of lending solutions that could meet your needs versus getting a subprime loan that you may later regret.
If you find yourself with a subprime loan, reach out to our Loan Processors for refinancing options. Refinancing your loan early on can help you save unnecessary finance charges.
Our Credit Union cares about your financial well-being and would like to help. You can call us at 855.922.5266 to learn about the lending options available to you.