What is a Subprime Loan?

A subprime loan is a mortgage loan that carries a higher interest rate than a bank or other lending institution's best available rate. On average, subprime home loans carry an interest rate that is 0.1% to 0.6% above prime rate. Sub prime loans are offered to borrowers with a FICO score between 520and 619 or for those who lack sufficient equity or collateral to qualify for an A paper loan. While this credit score certainly isn't the best, (a 680 FICO and above is considered good, while a 720 or above is considered great) it still allows a borrower to obtain a purchase, equity or home loan from a traditional lending institution.

Why Do Subprime Loans Carry Higher Interest Rates?

A subprime mortgage loan has a higher interest rate due to the fact that the lender sees the borrower as a higher risk. The borrower's lower FICO score or low equity in their current home signals to the lender that they are more likely to default on their loan. For these reasons, subprime personal loans and subprime debt consolidation loans have a higher interest rate.

Don't Shop For a Subprime Loan, Shop For the Best Loan Rate

The biggest mistake that people with poor credit make is to start out by looking for the best secured subprime loan they can find. Instead, they should search for the best loan rate that they qualify for. Begin with a mortgage broker, bank or credit union and see what they offer based on your financials. Even if you don't qualify with them, they will often have a close relationship with a California subprime mortgage lender.

Get Quotes From Several Lenders

Each lender will define sub prime home equity loans and subprime home improvement loans in slightly different ways. One lender may have a product that qualifies you for a slightly better rate or terms. Remember: a lender is not required to tell you that if you kept looking, you might find a lower interest rate for your subprime mortgage loan.