Subprime loans and predatory lending look similar sometimes

Subprime and predatory lending have a fine line that separates them

The price of home ownership is high if you are not one of the lucky few who can afford to pay cash. Otherwise, you will have to take out a loan for most of the price of the house and you will have to pay interest on that loan for 30 years, if you are the typical mortgage customer. That interest, even under the best of circumstances, can double or triple the amount of money you will pay over the life of the loan. But it could be worse - if you have poor credit, you may have to accept what is known as a “subprime” loan. And if you simply select the wrong lender, you may end up with a predatory loan. 

Sometimes, subprime loans and predatory loans can seem quite similar, but aside from the fact that they both cost more than “regular” loans, they have distinct differences. Below, we will compare the two so that you may be well informed about subprime lending and predatory lending and how they differ.

Subprime loan - A subprime loan is usually offered to borrowers who have a credit score of less than 620. A score below that figure suggests that the borrower has a troubled credit history; perhaps he or she has some unpaid debts or a history of making an occasional late payment. This being the case, the borrower will not qualify for the lowest interest rate that the lender offers, but for a rate that is several points higher. A borrower with good credit might get a loan at 6%; a subprime borrower might get the loan at 9%. In addition, the closing costs will be higher for the subprime loan. The fees and interest rates are higher for these loans due to the additional risk that the lender takes on when they issue the mortgage. Still, many borrowers are able to take out such a loan, make on-time payments for a few years, and refinance later at better rates.

Predatory lending - These types of loans exist for one reason only - to make money for the lender at the expense of the borrower. Predatory lenders take advantage of buyers who have few other alternatives due to insufficient credit or other hardships. These loans, like subprime loans, will have higher rates and higher closing costs. They may also have additional fees and large prepayment penalties. Unlike subprime lenders, predatory lenders have no interest in seeing their customers pay off their loans or refinance them. These are loans that are intended to bind the borrower to the lender for the duration of the mortgage term. These types of lenders are usually found through unusual advertising channels; it would not be unusual to see an ad for such a lender stapled to a telephone pole.

While both types of loans cater to those with less than ideal credit, only the predatory loan is offered with malice in mind. Lenders who offer subprime loans genuinely want to help borrowers buy houses; they simply want to make sure that they charge fees that are sufficient to cover their risk. Anyone who cannot qualify for a loan at prevailing market rates should take the time to shop for a lender carefully.