What Is a Subprime Borrower?

A subprime borrower is someone considered to be a relatively high credit risk for a lender. Subprime borrowers have lower 澳洲幸运5官方开奖结果体彩网:credit scores and are likely to have multiple negative factors in their credit reports, such as delinquencies. They may find it difficult to obtain creꦓdit, especially with favorable terms.

What Makes Someone a Subprime Borrower?

Banks and other lenders rely on 澳洲幸运5官方开奖结果体彩网:credit bureaus to provide 澳洲幸运5官方开奖结果体彩网:credit reports and credit scores on which to base their lending decisions. Credit scores are calculated using a variety of methodologies, but the higher the score, the better the person's 澳洲幸运5官方开奖结果体彩网:creditworthiness is assumed to be. The most widely used credit scores are 澳洲幸运5官方开奖结果体彩网:FICO scores.

Experian, one of the three major credit bureaus, breaks credit scores into five tiers. The top three tiers—referred to as "exceptional," "very good," and "good"—are reserved for individuals with credit scores of 670 and up. The highest possible FICO score is 850.

Subprime borrowers fall into the bottom two tiers, the "fair" and "poor" categories. Fair credit involves scores ranging from 580 to 669, while poor credit is anything lower than 580. The lowest possible score is 300.

Similarly, the Consumer Financial Protection Bureau classifies scores below 580 as "deep subprime," scores between 580 and 619 as "subprime," and those from 620 to 659 as "near-prime."

The Impact of Being a Subprime Borrower

Having a subprime credit score makes it 澳洲幸运5官方开奖结果体彩网:hard for 🃏borrowers to obtain crediꦰt cards and other forms of credit through traditional lenders. And 澳洲♒幸运5官方开奖结果体彩网:when they are able to obtain credit, they will generally have to accept less favorable terms—such as higher interest rates and lower credit limits—comp🃏ared with borrowers with higher scores.

澳洲幸运5官方开奖结果体彩网:Subprime lenders, companies that specialize in this market, are willing to take on the greater risk that subprime borrowers pose in return for those higher interest rates. While subprime lending can be a profitable business, it was one of the major factors that led to the 澳洲幸运5官方开奖结果体彩网:subprime mortgage crisis in the U.S. in 2008. Many lenders, specifically in the mortgage market, relaxed their requirements in order to attract more borrowers. These mortgages had higher rates of default and subsequently led to new regulations, primarily the 澳洲幸运5官方开奖结果体彩网:Dodd-Frank Act, which tightened the standards for lending across the credit markets.

Types of Subprime Lending Products 

In addition to traditional subprime lenders, a number of new companies, including some online lenders, now focus on subprime and so-called 澳洲幸运5官方开奖结果体彩网:thin-file borrowers. The latter are individuals with little or no credit history, making it difficult to compute a credit 🦂score for them. New graduates﷽ and newly arrived immigrants, for example, often have thin files.

Credit bureaus have begun to adopt new credit scoring methodologies for such borrowers. FICO competitor 澳洲幸运5官方开奖结果体彩网:VantageScore says that its scoring model can "score approximately 37 million more consumers who typically are not scored by conventional models" due to limited credit histories༒ "without relaxing standards."

Taken together, these developments have helped to inꦐcrease the available offerings for subprime and thin-file borrowers.

One widely available product that provides an alternative for subprime borrowers is the 澳洲幸运5官方开奖结果体彩网:secured credit card. With a secured card, the borrower puts money into a special bank account and is then allowed to spend up to a certain percentage of that amount, using the card. After a period of time, the borrower may be eligible to upgrade to a regular credit card with a higher credit limit. Investopedia periodically 澳洲幸运5官方开奖结果ꦆ体彩网:reviews and rates secured credit cards.

Some issuers also offer conventional, unsecured credit card♒s tailored to subprime borrowers. However, the interest rates on these credit cards can top 30%, and they often carry annual fees of $100 or so plus monthly fees ranging from $5 to $10. In addition, these car🅷ds usually have a lower credit limit than other cards, which is another way lenders mitigate some of the subprime risks.

Besides credit cards, many subprime lenders also offer non-revolving 澳洲幸运5官方开奖结果体彩网:installment loans, such as car loans, wi🌊th interest rat🥃es in the range of 36%.

澳洲幸运5官方开奖结果体彩网:Payday lenders are another, and more controversial, subprime credit alternative. These lenders provide short-term loans at 澳洲幸运5官方开奖结果体彩网:annual percentage rates (APRs) that can exceed 400% in some states.

In mortgage lending, subprime borrowers can present less risk than with other types of loans because the mortgage is secured by the home itself and the lender can 澳洲幸运5官方开奖结果体彩网:foreclose if necessary. Still, subprime borrowers may have a more difficult time obtaining a mortgage and can expect to pa🦂y a higher interest rate ♒than the average borrower if they do.

The Bottom Line

Being a subprime borrower severely limits the types of credit that are available to a person. So it's important for anyone in that situation to do what they can to improve their credit score, especially if they expect to need a loan or credit card in the future.