Applying for a Sub Prime Loan

2007-03-08 10:33:40

( Financial )



People take advantage of a sub prime loan to purchase a new property at the current market value instead of waiting for the positive change in their credit history. Once the sub prime mortgage is granted, they can be given the opportunity to claim back their good credit rating and then obtain refinancing at a lower interest rate.

There are some people who decide to apply for a sub prime loan, even if there is a higher interest rate and initial down payment. This is mainly due to the fact that they need the funds to settle their past due credit card bills or other expenses to improve their credit history.

A sub prime loan is a short-term loan that is normally paid back within 2-5 years. Responsible borrowers use this time to clear up their credit score by repaying their sub prime mortgage or loan on time. They can then obtain another loan with better interest charges.

How much you earn, what you own and you work history are some factors that are considered when sub prime lenders decide on the amount of loan to grant to you.

When considering a sub prime loan, it is strongly recommended that sub prime borrowers carefully compare the offers that sub prime lenders provide in terms of interest rates and conditions of the loan. Sub prime lenders obtain the money they loan to you from various places and as a result, the rates and fees of a lender can vary from one company to another. For this reason, the sub prime lenders’ interest rates and fees can be negotiated and agreed upon more easily, compared to a typical loan.

A sub prime lender depends on the FICO score of the sub prime borrower. The word FICO is derived from the scoring of Fair Isaac & Company, that tells whether a borrower is capable of paying their debts. The rating is based on a letter code and sometimes; a better interest rate can be given if the score improves by one letter.

Sub prime borrowers should also realize that there are penalties given when prepaying sub prime loans. Agreeing to a longer repayment term can lower interest rates. However, this option will not be good for improving the credit score of the sub prime borrower.


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