Consumers baffled by prime vs. subprime loans
FICO Scores are one of the primary metrics that lenders use to assess a borrower’s creditworthiness. Because of this, your credit score can influence the chances of your loan being approved and the rates and terms offered. What follows is what you need to know about prime vs. subprime loans and how they’re different.
Borrowers may be categorized as prime or subprime with their selection of loans because it is based on FICO Scores. These credit-rating ranges are often referred to as “prime” and “subprime.” Borrowers with solid FICO Scores may be rewarded with prime loans. Still, those with lower or damaged credit may only be eligible for subprime loans. Understanding the two concepts can better help you understand loans.
Comparing Prime and Subprime Loans: What’s the Difference?
The most significant difference between prime and subprime loans will usually be in the interest rates they charge. It’s generally considered riskier to lend to borrowers with bad or limited credit histories, so lenders charge higher rates to compensate for that risk.
A recent Columbia Business Law Review study found that subprime auto loans can have interest rates exceeding 29%. And the CFPB found that payday personal loans, which subprime borrowers may turn to as a last financing resort, can charge fees that translate to annual percentage rates (APRs) of nearly 400%.
There may be other differences, as well. Prime loans, for instance, may be offered in more significant loan amounts. Subprime loans, on the other hand, may require larger down payments or charge higher origination fees.
A recent study by the Business Law Review at Columbia University revealed that subprime auto-loan interest rates might reach 29 percent. At the same time, the CFPB found that, on average, payday lending loan prices go nearly 400 percent per year.
Other differences may exist, as well. Prime loans, including this example, may even be accessible in larger loan quantities. Subprime loans, however, might be charged in an increased down payment size or necessitate an increased origination fee.