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If you're enjoying the view from your prime beachfront property while savoring a USDA Prime steak, it's safe to say things are pretty good. But what does "prime" mean when it refers to a loan, and what makes a subprime loan different? Compared with a prime loan, a subprime loan may come with a higher interest rate because it's designed for borrowers who are at greater risk of defaulting.
Subprime loans can help borrowers with less-than-perfect credit finance homes, cars and other major purchases, but they also have some downsides that are important to know about. Understanding the differences between prime and subprime loans can help you make smart decisions when borrowing money.
Prime Loans vs. Subprime Loans
When lenders consider your loan application, they assess factors including your credit score, credit history and debt-to-income ratio (DTI) to determine your creditworthiness and how much risk you present as a borrower. You might be considered high risk if you are new to credit, if you have a fair or poor credit score, or if your credit history shows serious negative events such as a bankruptcy in your past.
Lenders use risk-based pricing to set loan terms such as interest rates and fees. There are different credit scoring models, and each lender may have its own criteria for assessing your creditworthiness. A FICO® Score☉ of 670 to 739 is considered prime and generally qualifies you for loans at competitive rates, if your FICO® Score is 740 or above, you're considered super prime and can qualify for the lowest rates.
Experian generally defines subprime borrowers as those with a FICO® Score of 580 to 669, or fair credit. Subprime loans include many of the same types of loans open to prime borrowers; there are subprime mortgages, auto loans and personal loans (and subprime scores can vary depending on the type of loan and lender). But because these loans are designed for subprime borrowers, there are some key differences.
- Higher interest rates: Subprime borrowers are viewed as a greater lending risk compared with prime borrowers, so lenders tend to charge higher interest rates to protect themselves.
- Larger down payments: If you're getting a subprime mortgage or car loan, you'll usually have to make a bigger down payment than you would for a prime loan of the same size.
- Smaller loan amounts: Subprime borrowers may not be able to borrow as much as prime borrowers.
- Higher fees: Lender fees such as origination and late payment fees are typically higher for subprime loans.
- Longer repayment periods: Subprime loans often take longer to pay back than prime loans. The term of a subprime car loan, for example, might be 60 months compared with 36 months for a prime loan of the same amount. Longer repayment periods reduce your monthly payments, but usually mean you will pay more in interest over the loan term.
- Adjustable interest rates: Fixed interest rates don't change over the life of a loan, but many subprime loans have adjustable interest rates. Adjustable interest rates are locked for a set period; after that, they typically adjust every year, which can lead to steep increases in both monthly payments and total interest.
How Do Subprime and Prime Loans Affect Credit?
Both subprime and prime loans affect your credit in the same way. If you make your loan payments on time, both can help improve your credit score. If you miss loan payments or default on either type of loan, however, your credit score can suffer.
Are you trying to boost your credit score into the prime range? The way you manage a subprime loan can help. Doing the following can help ensure the most positive impact on your scores:
- Make sure your payments are reported. Before you apply for a subprime loan, ask if the lender reports your account to the three consumer credit agencies: Experian, TransUnion and Equifax. This ensures your on-time payments will show up on your credit history, which can help to improve your credit.
- Always make your loan payment on time. To avoid missing a payment, set reminders, put the loan due date on your calendar or set up an automatic payment from your bank account. (Just be sure to have enough money in the account to cover the payment.) The timeliness of your payments is the single biggest factor in your FICO® Score.
- If you do miss a payment despite your efforts, don't panic. Instead, pay it as soon as you possibly can. Late payments aren't reported to credit bureaus until they are 30 days past due. Although you may be charged a late fee and face other penalties, a payment that's a couple days past due shouldn't affect your credit score.
How to Get a Subprime Loan
Lenders have different definitions of subprime borrowers, so checking your credit score won't give you a definitive answer on where you stand, but it will give you a good idea. If your credit score falls at the high end of the subprime range, you may get better loan terms by delaying your loan application a bit while you work to improve your credit score. (More on that later.)
If you're solidly in the subprime category, follow these steps to get the best subprime loan for you.
You can get subprime loans from banks, credit unions or online lenders. Your bank is a good place to start but be sure to compare loans from several different sources. For example, you can find companies that specialize in subprime loans. Consider credit unions, which cannot charge more than 18% on subprime loans—lower than some other lenders. In most cases, you'll have to join the credit union, which typically requires opening an account, before you can apply for a loan. Need a subprime personal loan or auto loan? You can save some time by using Experian CreditMatch™, a free tool that shows you the lenders best suited for you based on your credit score.
The best way to see if you can get approved for a subprime loan is to apply for several of them. Each loan application triggers a hard inquiry on your credit report, which can temporarily lower your credit score. However, if you complete all your applications within a few weeks, credit scoring models will treat them as one inquiry, so you won't be penalized for comparison shopping. FICO® will count all loan applications submitted in the same 45-day period as one inquiry; VantageScore® gives you 14 days.
Depending on the lender, you may have to provide documentation such as a recent pay stub to demonstrate your income, contact information from your employer to verify your employment, or bank account statements to confirm your assets.
If you're having trouble getting approved for a subprime loan, see if the lender will allow someone who has good credit to cosign on the loan with you. Since the cosigner will be responsible for repaying the loan if you don't, and the loan will appear on their credit history, make sure they are willing to take the risk.
In your search for a loan, watch out for payday loans and auto title loans. Such loans can charge interest rates of 400% or more, in addition to high fees, and can leave you deeper in debt than before or cause you to lose important property.
How to Improve Your Credit and Become a Prime Loan Borrower
Prime borrowers have FICO® Scores of 670 or above and a history of paying their debts. As a result, lenders consider them lower risk, and it's generally easy for them to get competitive rates on loans. Super prime borrowers, who have FICO® Scores of 740 or higher, are even more desirable to lenders and can qualify for the lowest rates.
Over time, getting the lower interest rates available to prime borrowers can save you hundreds or even thousands of dollars on a loan. To become a prime borrower, you'll need to improve your credit score.
Start by getting a copy of your credit report from each of the three major credit bureaus (Experian, TransUnion and Equifax). You can get free copies of your credit reports through AnnualCreditReport.com. Review your credit reports carefully to make sure they're up to date and accurate. If you suspect fraudulent activity or believe information is incorrect, contact the credit bureau to file a dispute.
If you have any late accounts, bring them current. Going forward, focus on paying all your bills on time. Paying down debt and reducing your credit utilization rate can also help boost your credit score.
Enrolling in Experian Boost™† can be a quick way to increase your FICO® Score from Experian. This free service gives you credit for paying your phone, utility, certain streaming services and other bills on time.
Avoid opening new credit accounts or closing existing credit accounts. Even if you aren't using them, having those accounts on your credit report can add to your credit mix, lengthen your credit history and provide more available credit, lowering your credit utilization ratio. You may, however, consider closing a credit account if it charges high annual fees you have a hard time keeping up with.
As you work to improve your credit score, Experian's free credit monitoring service can help you track your progress over time and alert you when your FICO® Score changes.
Should You Get a Subprime Loan?
If you need money quickly, a subprime loan might be your best option. But keep in mind that the bigger the subprime loan amount, the more the higher interest costs will add up. For example, interest on a subprime mortgage loan over 30 years could cost you tens of thousands of dollars more than interest on a prime loan for the same amount. Think long and hard about whether you really need a loan immediately or whether you should wait until you've improved your credit score—and your odds of qualifying for a prime loan.