Prime Loan vs. Subprime Loan—What’s The Difference?
In today’s lending market, a loan comes in many forms. The terms of a particular loan can vary based on the amount you want to borrow, your credit score, and whether you have collateral. But even if you’re looking at two loans with similar terms, they might be different enough to warrant a closer look—mainly if one type offers lower interest rates or better terms. So take a closer look at the differences between prime and subprime personal loans:
You would typically get a prime loan from a bank or credit union. It’s a standard, low-risk loan with a fixed interest rate and a longer term than subprime loans.
According to Lantern by SoFi experts, “A subprime loan is essentially a loan option for borrowers who have trouble getting loans through a traditional route.” Subprime loans are riskier because they’re more likely to be in default or foreclosure. However, because there’s more risk involved, the lender can charge higher rates for these types of loans.
The repayment period of an auto loan is the amount of time you have to pay off your balance. The lender usually sets this, but it can be negotiated. So, for example, if you want to buy a car today and know you’ll be able to pay back your loan in five years rather than ten years, then that may be something you can work out with your dealer or lender.
Many prime loans have fixed repayment periods between five and 30 years, depending on the loan’s interest rate and what kind of vehicle has been purchased. For example, a subprime loan often has a fixed repayment period between two and five years due to its higher interest rate (and thus lower monthly payments).
Prime loans are for more significant amounts, from $1,000 to $5 million. Subprime loans are much smaller and range from $500 to $40,000.
Subprime lenders typically require a co-signer with good credit or a guarantor (a person who agrees to pay the loan if you default on it) if you don’t have enough income or assets to qualify.
The subprime loan is more expensive than the conventional option. While the interest rates and fees vary, they can be anywhere from 1% to 3% higher, depending on your credit score and other factors. That may seem like nothing, but it quickly adds up over time, especially if you’re taking out a longer-term loan.
The higher fees are justified by the risk associated with subprime borrowers since they’re considered higher risk than conventional borrowers. As such, this means that companies also charge much more in terms of upfront costs (i.e., origination fees) for loans made to these borrowers and penalty fees if certain conditions are not met during repayment (like paying late or going past due).
Knowing the difference between prime and subprime loans can help you decide which is right for your needs. A prime loan is typically more expensive than a subprime one, but it also allows borrowers to borrow larger amounts of money at lower interest rates with longer repayment periods. So, for example, this may be the best option if you’re looking for financing to help you buy a car or pay off credit card debt.