What is Subprime Lending?

By Stock Research Pro • May 13th, 2009

Subprime lending, also known as second chance or near-prime lending, is the practice of extending credit to borrowers in ways that do not meet “prime” standards. Subprime borrowers may be classified as such due to bad credit or a lack of credit history, maxed-out credit, or less than desirable debt to income measures; any of which can make loans to these borrowers more risky for the lender. Subprime lending can refer to various types of credit, including home and car loans or credit cards.

About Credit Reports and Credit Scores

The term “credit” is used to describe the profile of a borrower and the likelihood that they will repay a loan. In assessing the credit-worthiness of a borrower, the lender will review the borrower’s credit reports to understand their credit history. In reviewing these reports, the lender will learn how much they have borrowed in the past and the details of the repayment. These results are quantified in the borrowers credit score. While the credit score used to separate prime from subprime varies with the lender and the type of loan, a score of 650 or better is typically considered to be good. A score of less than 620 will usually put the borrower in the subprime category.

If You’re a Subprime Borrower

Subprime borrowers are seen as a greater risk to lending and are typically required to pay more in interest to compensate the lender for that risk. Borrowers in the subprime category usually find they have fewer choices in terms of the lending products available to them and the lenders that are willing to work with them. Even so, proponents of subprime lending believe that this practice of extending credit to people who would otherwise have no opportunity to borrow is important.

Tips for Subprime Borrowers

Review Your Credit Score: Learning your credit score will help you to know where you stand as you seek credit for any purpose. You can access your credit reports and credit score online from the three credit bureaus: Experian, Equifax, and Trans Union.

Analyze Your Credit Report for Accuracy: It is not unusual for information to be entered inaccurately in these reports. If you do find an error, you should contact the credit bureau immediately to resolve the issue.

Shop for the Best Deal: Even subprime borrowers have the opportunity to shop around for the best deal they can get. Your best opportunity might be in working with a financial institution (bank, credit union, etc.) with whom you already have an account and an established history.

Improve Your Credit Score

It’s important to note that your credit score can change and improve over time if you do the right things, including:

• Make sure to pay your bills on time

• Become less reliant on credit cards in order to increase the gap between your balance and your credit limits

• Pay off as many accounts as you can and when you do, keep them open in order to continue to establish good credit history

• To the best of your ability, avoid filing for bankruptcy as this is one of the worst events your credit history can show


The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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