What are subprime lenders?

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A subprime lender is a finance company, lending institution or individual that specializes in issuing loans to borrowers with credit profiles that are rated less than prime. Subprime lenders exist in both the commercial and consumer loan industries to provide financing alternatives to companies and individuals with less-than-perfect credit profiles.

But subprime lending refers to more than just credit reports and FICO scores. The terminology “subprime” can refer to any loan underwriting criteria that can increase the proposed loan’s riskiness and lender’s risk exposure. In fact, many subprime programs still require borrowers to have excellent credit scores.

Factors considered by subprime loan providers

Any of the underwriting factors listed below can make a loan (and its lender) subprime:

  • Insufficient income. Traditional lenders want written proof that the borrower can afford the proposed loan. Subprime lenders, however, may allow for higher debt-to-income (DTI) ratios or alternative income documentation (such as bank statements instead of actual paystubs).
  • Unstable employment. For most consumers, income relies on employment. Traditional lenders want confirmation that borrowers have stable jobs, insisting on continuous employment history. Subprime lenders may be more willing to accept gaps in recent employment history, relatively new jobs or even self-employment without a long track record.
  • Insufficient collateral. Traditional lenders sometimes require collateral with a value significantly above the loan amount. Subprime lenders can sometimes offer more flexible collateral requirements. For example, some subprime mortgage lenders may lend to homebuyers with less down payment or homeowners who have no equity in their home. Similarly, some subprime personal loan providers may offer unsecured installment loans with no collateral requirement.
  • Insufficient reserves. Traditional mortgage lenders, as well as other prime lenders, require evidence that the borrower will have cash reserves to cover several months of monthly loan payments. Subprime lenders can waive or loosen those reserve cash requirements.
  • Less-than-perfect credit. For many lenders, the determining factor is the borrower’s credit rating or score. Borrowers with damaged credit records or low credit scores may not be able to get loans from traditional lenders, but they may be able to obtain alternative financing from subprime lending institutions and companies.

In the consumer finance arena, borrowers with prime credit profiles have credit reports that show timely payment histories, as well as documented income and assets, and responsible credit use. Subprime loans are loans issued to borrowers who do not fit the profile of a prime borrower, and they may require higher interest rates and different loan terms, as compared to prime loans.

Types of subprime loan programs

Subprime lenders offer alternative financing programs in almost every area of consumer lending and finance. Here are a few examples:

Subprime lending provides an opportunity for consumers to obtain financing for a variety of purposes. However, subprime loans are not for everyone. Individuals who may be interested in a subprime loan should perform their due diligence (including examination of the subprime lender’s license or charter), review all their options and consult with a financial advisor before agreeing to a subprime loan.

Disclaimer: NetCredit is a direct personal loan provider and does not provide financial advice, nor does it vouch for any vendor or service mentioned on our NetCredit personal finance blog or online consumer loan glossary. Always research and perform due diligence on any service provider or vendor before deciding to use them, and we recommend that you speak with a financial advisor regarding all decisions that will affect your finances.

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