How to Compare Interest Rates on Subprime Loans

Almost anyone who does not have a top credit rating can still obtain financing by applying for a subprime loan. The interest rates on these subprime loans are always higher than on prime loans but loan companies vary on how much more they charge for interest for making a subprime loan as each individual presents a different credit risk. Here's an easy way to compare subprime loans.

Difficulty: Easy

Instructions

1. Make a chart listing every possible expense connected with obtaining a new subprime loan. Include items like interest rate, application fees, credit report fees, escrow accounts, origination fees, start-up fees, closing fees, insurance policy, recording fees, program fees and participation fees.

2. Contact at least three different lenders and obtain answers for every expense. They may use different terminology to mean the same as the above. Ask every question you can think of.

3. Total each of the lender's expenses to arrive at the total interest to obtain a subprime loan from each one.

4. Ask the lenders exactly what someone with excellent credit would have to pay to obtain a similar amount of money.

5. Compare the total interest and expenses of the different lenders to determine which can give you the best total interest rate.

6. Decide whether you really must borrow the money, considering the cost of borrowing it. Decide whether you can easily make the payments.

Tips & Warnings

• Watch out for the following hidden costs when obtaining a subprime loan: excessive interest rates; being obligated to purchase a single-premium insurance policy; high origination and closing fees; making interest-only payments so you never pay down the principal amount; program fees and participation fees; high application fees.
• Watch for prepayment fees. You need the right to pay off the loan in full ahead of time if you choose to, without having to pay an additional fee to do so.

Resources

• Compare subprime loan interest rates at LendingTree.