Subprime loans are used as a way to finance individuals who have poor credit, low income, or limited credit history and do not qualify for conventional loans.
Most auto loans, mortgages, and personal loans are the types of loans that have subprime options.
In such cases, lenders focus on a borrower’s income instead of their credit score just to ensure that the borrower has enough money to repay the loan.
Though technically there are no credit score cutoffs for many types of loans, borrowers with credit scores below 650 have a hard time getting approved for conventional loans.
The loan approval depends on many factors, like having a good credit score is one of the most important factors because it will show whether you can pay off the loan or not.
To help people with poor or little credit history, subprime loans were created so they can qualify for loans and assist them in buying a home, car, or financing other things that they may not be able to fund on their own.
Because of their credit history even if many borrowers have the financial ability to pay off a loan, but need help qualifying for a loan.
Desperate borrowers who have exhausted other options and know very little about loans, fall prey to some lenders who charge these borrowers high interest and fees.
Lenders sometimes tend to hinder a borrower’s ability to repay the loan by charging high-interest rates and by taking advantage of the borrower’s situation or lack of financial understanding.
There are laws in many states to prevent high-interest rate loans and control predatory lending, but, sometimes, it still happens.
Because of their name, higher interest rates, and their association with predatory lending subprime mortgage loans tend to have a bad reputation.
However, there are some advantages to getting a subprime mortgage loan when you don’t qualify for a conventional loan and are capable of repaying the loan.