What Is A Subprime Lender?

What is a subprime lender?  This is a lender who lends to borrowers who are unable to qualify for loans from mainstream lenders. Some subprime lenders are independent, but increasingly they are affiliates of mainstream banks and lenders which operate under a different name.  

Subprime lenders do not advertise themselves as such, and normally, the only way to recognize them is by comparing their prices.  These are usually higher than the traditional banks and mortgage companies.   

If you are uncertain what your credit rating is, you may want to find a bank that offers both prime and subprime loans.  There is an advantage to dealing with a broker that offers both types of loans, they will try to obtain a lower prime rate loan first, and only if that doesn't work out, will they try to get a subprime loan. 

A subprime only lender typically will not try to get you a prime rate loan, because they will make less money on the loan.   

To understand what a subprime broker is, you need to understand what a subprime borrower is.  This is someone who cannot qualify for a traditional loan due to poor credit scores.  If your credit score is too low, you cannot qualify for any type of loan.  However, if your credit rating is a somewhat higher, you can qualify for a subprime loan. 

Your credit score will determine the amount of down payment, interest rates and monthly payments.    A subprime mortgage broker tends to charge higher fees because of the larger risks associated with lower credit scores.  A higher percentage of subprime loans will go into default when compared to traditional loans.  Also, the lender will incur additional costs because a higher percentage of the applicants are rejected. 

Many people that obtain subprime loans tend to treat them as a temporary loan and prepay them early, thus saving a great amount of interest.  As a result, most subprime loans have a prepayment penalty.  The lender is hoping the borrower keeps the loan at the higher interest rate and thereby increasing the income of the mortgage lender.