Prime vs. Subprime Loans

When it comes to buying a car or a home, many times you’ll find that you need a loan to help you pay for it. Even if you apply for a loan, there is no guarantee that the bank or loan office will approve your submission. However, your credit score may be what is standing between you and the loan you need.

Prime

People with excellent, good, and even fair credit are likely to qualify as a prime borrower. Being a prime borrower means that your credit score is in the mid-600 to 850 range, though each lender will have criteria for measuring credit. For example, they’ll also consider your income, debt utilization, and overall finances.

Prime loans are often a fixed rate, meaning that the loan commissioner won’t make adjustments later to increase or decrease your interest rates, plus the down payment will be lower, thus making your investment more affordable. Most prime borrowers use their loans to pay for cars, homes, or higher education. Higher credit can also help you qualify for better credit/rewards cards.

Subprime

While prime borrowers have a credit score above 650, subprime borrowers typically have bad, poor, or even low fair credit…or no credit at all. When a loan officer reviews your loan request, they will take into account your credit as well as your credit history, bill payments, and bankruptcies. Approving a loan for a subprime borrower is risky, which is why interest rates are always higher for lower scores.

Subprime makes it difficult to qualify for certain credit cards because there is often a higher interest rate—and it’s typically adjustable. So if you aren’t meeting your payments, they’ll adjust the interest to make it higher. If you are buying a home with a subprime score, the downpayment will be large, but mortgage companies will often still be willing to work with you since they can use the home as collateral and take it from you if you don’t pay.

Subprime to Prime

If you have a subprime score, work diligently to make your payments on time and in full to help steadily better your credit. You can set up a reminder system to notify you when it’s time to make your payment. Besides making your current payments, be sure to pay off any missed payments. Make a budget to help visualize and plan how you will save and set aside money for your credit. You can also pay down some of your debt to improve your credit utilization, keep your old accounts open, and avoid applying for multiple accounts within a short window of time.

It’s important to pay close attention to your finances for multiple reasons, but one is to avoid becoming a subprime borrower. Check your credit and meet with a representative to understand your current standing and how you can improve your credit. Being a prime borrower will help you save money over time and will make it easier to qualify for loans. If you currently have a subprime score, keep working at increasing your credit and stay focused on your finances.