4 Reasons To Avoid Subprime Personal Loans

Subprime personal loans are offered to people with poor credit histories. Some lenders will offer loans to people with less-than-good credit ratings. However, these loans come with high rates and other risks. Before you apply for one of these subprime loans, here are four reasons you may want to avoid a subprime personal loan altogether.

1. High Interest Rates

Subprime loans involve interest rates that are higher - sometimes much higher - than the rate on prime loans. This is because the borrower is considered to be at high risk for default. Therefore, the high interest helps make up for the risk the lender is taking. Depending on your credit score and financial history, which your lender will go into in-depth, you will be charged an interest rate that is several percentage points higher than the average rate. Some lenders incur interest rates of as much as 30%.

2. High Fees

In addition to the interest rate, subprime lenders charge other, upfront fees. For instance, they will probably charge you for doing a credit check, processing paperwork, etc. These fees can really add up, because subprime lenders generally charge their clients as much as possible. This is another way they try to build up a buffer zone of profit in case of default.

3. Collateral Requirements

The terms of many subprime personal loans will require that you put up collateral. This will usually be your house or other real estate. If you do not own a home or property, collateral can be another item of considerable value, like a car or a coin collection. If you default on the loan, this property will be confiscated by the lender and sold in lieu of payment. If you do not own a home or any other belongings you can put up as collateral, the lender will probably increase your interest rate instead. 

4. Few Options in Case of Default

If you do default on a subprime loan, your chances of getting a loan or even a credit card in the future are extremely slim. Until you repair your credit, even subprime lenders will consider you too much of a risk. Recovering from default on a subprime loan may take years, and will leave you with little in the way of assets. Especially for this reason, if you already have bad credit, you should consider a subprime personal loan only as a last resort.

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