What’s worse than lacking the financial capability to respond to a financial emergency? Being out of credit options. But before you pull out your hair in frustration and let your anxieties take over, know that there is hope in subprime loans. What is a subprime loan and how can you take advantage of this credit alternative?
Subprime Loans Defined
A subprime loan is a type of loan that is offered with higher interest rates compared to prime rate loans. Its market usually includes borrowers who have been repeatedly denied in their prime rate loan applications due to less than stellar credit standing. A subprime loan is a common alternative among many and practically gives them an exit route without resorting to predatory payday lending. However, due to the still risky nature of its rates, borrowers are encouraged to evaluate their financial situation first before deciding on taking this financial plan B.
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Personal Loans at Subprime Rates
Personal loans defined independently, are a loan type that does not require the borrower to put in a collateral. Thus, they are considered higher risk for lenders. In order to make up for this, they charge higher interest rates for this type of loan than those offered for secured loans.
Personal loans at subprime rates, therefore, would seem like a financial deathtrap — and it relatively is, depending on your personal financial habits. But if you have evaluated yourself enough, have determined that your financial challenge is temporary, and are confident that you can carry the risk without getting yourself into a debt cycle, then a subprime personal loan is indeed a very feasible option.
Getting the Best Out of Subprime Personal Loans
Having bad credit is not the end of the world. There are reputable lenders available who cater to borrowers with credit scores 629 and below. Take your time to shop around for subprime rates and as much as possible, never resort to payday lenders.
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In finding the right lender, the first thing you need to consider is their transparency about fees, terms, rates and underwriting policies. By knowing these information head on, you will be able to estimate how much the loan would cost you in the initial process of acquisition and accurately compare your options.
Expect high interest rates. Whether you have a thin credit history or something happened in the past that caused damage to your otherwise good credit standing, this would reflect on your credit record and affect the lender’s perception of your paying capacity. It is not uncommon to be offered subprime interest loans at 20 percent or higher.
It is important to know that legal lending institutions or financing agencies offering subprime loans are guided by regulations to not go beyond a certain limit in their rate offering. This makes them better options than payday lenders.
A first-stop option you should look into if you are in for subprime loans is your local credit union. Credit unions usually offer lower rates than their private lending counterparts. Here, you are most likely to get surprising deals as low as 18 percent.
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The Bright Side
Although choosing to get a subprime loan seems like a desperate gasp for air at first glance, it actually has the potential to help you build your credit and thus improve your credit standing. This in turn will help you get better loan deals with much lower interest rates in the future.
Before locking in on a rate, think how the loan would integrate into your budgeting. Make sure it is correspondent with what you can afford to pay every month.
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