Is A Sub-Prime Loan Right For You?

Let's define what a "sub-prime" loan is, OK?

First the "prime rate loan". A "prime rate" loan is the type of loan made to the very best qualified borrowers. These loans tend to be longer, lower interest, may be interest-only, and usually have lower loan fees. The borrower has provided the lender with a "prime package" of collateral, capacity, and character. For these reasons, the lender has a lower perceived risk on the loan, and delivers the best terms.

A "sub-prime" loan has more restrictive terms and less desireable features than a prime loan. The lender is much more defensive about their position, and will restrict the terms and charge more.

Here is an example of a "prime rate loan":

• loan amount is 95-100% of the purchase price
• term is 30 years, 15 years, or interest only
• interest rate is the lowest available (at this writing 5-6%)
• interest calculation method is "simple interest"
• collateral is the asset pledged (home) only

Terms of a "sub prime loan" might be:

• loan amount is 85-95% of the purchase price
• term is 15 years
• interest rate is a few percent higher (about 9-10% at this writing)
• interest calculation method is "simple interest", or "pre-computed"
• collateral is the asset pledged (home), and sometimes other collateral

Obviously, we would all prefer the "prime rate loan". Will a "sub prime loan" work for you? It could be the answer for you if you have a history of bad credit. If you finance with one of these loans, and then pay on time, you will greatly improve your credit rating.

Once you have better credit, you may refinance at a lower rate. Some lenders have this feature built in to bad credit loans, so that if you pay on time for the first two years, the rate will automatically drop, thus saving you the cost of refinancing later. Do a search on this phrase "bad credit loans" and you will see lenders who may have such a program for you. Lenders today are much more flexible and willing because of the competitive loan marketplace.

What may be a big sticking point is the down payment. Start saving! Also, you may be able to get a "down payment grant" which will satisfy your lender and these grants don't require repayment. Ask us about these grants or lenders that permit them if you are ready for one of these loans.