What Is A Subprime Loan?

In the last number of years there has been a lot of talk about subprime loans, specifically with regard to mortgages.  However, subprime loans are not by themselves a bad thing.  Perhaps you are wondering, what is a subprime loan?

To understand a subprime loan it's helpful to first understand what the prime interest rate is.  The prime interest rate is the rate under which banks will loan to their customers that have the least likelihood of defaulting.  Some bank customers have very high credit ratings which reflect the fact that they are not likely to default or stop paying on a car loan in Tecumseh.  Because they are highly likely to pay the bank back according to the terms of the loan they are offered a low interest rate known as the prime rate.

The prime interest rate changes and fluctuates according to the federal funds rate.  The federal funds rate is the rate at which banks loan to one another.  When you hear on the news all the talk about the Federal Reserve or the Fed changing the interest rate, this is the one that they are talking about.  However, the Fed can't dictate the exact rate that banks use, they simply set a target rate and the actual federal funds rate is determined by market forces.

So, now that you understand the prime interest rate, we can put into perspective what a subprime loan is.  A subprime loan is one that has a rate that is greater than the prime interest rate.  Typically, the lower your credit score the higher interest rate that a lender will charge you.  The rate of a subprime loan is not a set rate but can change depending on the borrower and the lender.  Sometimes borrowers with low credit are turned away from traditional banks and lenders.  These kinds of borrowers are sometimes called subprime borrowers because their credit score and other factors indicate that they are likely to default on their car loan in Windsor.Bad credit car loans in Windsor are not a bad thing.  If you use a subprime loan to pay down a higher interest rate debt like a credit card then, perhaps, it could be a good thing.
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