Sub prime Lending
When a potential borrower walks into a bank and sees a sign for “zero interest for six months and a 3.5% APR,” their heart flutters with all the possibilities that money could bring. However those signs, with all the promises they bring, can be quite misleading Not everyone can qualify for those rates, only borrowers with good credit history can normally qualify, and in fact, the type of loan discussed in this article is for those whose credit history is much less then perfect.
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What are they?
Bad Credit Loans, also known as sub prime loans, are loans to borrowers with poor or limited credit history. These loans often require more collateral, higher down payments, and/or higher interest rates than normal loans, and can take longer to get. However, since the late 90’s sub prime lending has become much more common. In fact, a recent article in USA Today stated that in 2003, 9% of loans were sub prime.
Qualifying for a Loan
When a consumer goes to borrow money in the form of a loan, the lender often takes a look at credit history. Most of what a lender is looking for is amount of credit, amount of established credit, and to make sure there are no delinquencies, charge offs, or in major cases, bankruptcy. In the past, any of these things could make it next to impossible to get a loan, but these days, with a little extra cash, or a cosigner anything is possible. If a borrower’s credit is damaged, the lender may require the borrower to pay a down payment, or secure the loan with some form of collateral. Collateral is assets owned by the borrower that are used to promise the repayment of a loan. In other words, if you don't pay, the lender gets to take your collateral. Along the same lines, if a borrower is buying a house, car, or other piece of physical property with a sub prime loan, the lender may require them to put extra money down as part of a down payment.
Having a cosigner is also a way to get a loan that a borrower may not otherwise qualify for. A cosigner is another person whose credit is stronger than the borrowers, who will join in the loan with the borrower, therefore strengthening the creditworthiness of the loan. However, if the loan goes unpaid, the cosigner can be held liable for unpaid amounts.
Finally, a person with poor credit may qualify for a loan with a higher interest rate, therefore forcing the borrower to pay the loan on time in order to avoid too much accruing interest.
Bad Credit loans are definitely helpful in getting a borrower what they need regardless of past credit history, but they can be harmful. Sometimes borrowers will take out too many loans and end up getting themselves in trouble paying each loan. Also, the interest rates are often so high that they will take years to pay off.
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