Avoiding sky-high interest rates is every subprime borrower's goal. While there are many options and ways to work towards that goal, avoiding higher than average rates may be challenging. Here are some tips for consumers shopping for subprime loans and other subprime financial instruments like prepaid credit cards and checking accounts.
According to Equifax, 4 out of every 10 loans ranging from credit card, car loans, and personal loans were subprime during 2014. That's a lot of subprime loans and is actually the highest since 2007. Back in 2007, almost 42% of loans were given to subprime borrowers. In fact, while the demand is obviously still there, many banks are pulling back or slowing down.
Upon our initial search, we kept coming back to Ally Financial, as well as General Motors Financial, which seem to be giving the lion share of the subprime auto loans in recent months. Ally's average FICO score, for their lower scoring group, was in the mid 600 range, while GM was closer to the mid 500s. Many of these loans can be offered at car dealerships during a purchase, but experts recommend that you first check with banks or financial institutions which you already have a relationship with, and then compare the options. Sometimes, the relationship opens up more options.
Many subprime consumers have trouble getting approved for traditional credit cards, so secured cards were created as a means to offer the benefits of a credit card with protections for the lender. Essentially, a secured or prepaid credit card looks and functions just like any other credit card or checking account, but with one major difference: consumers must first deposit funds which are generally equal to the credit that is then offered. Basically, you are prepaying a credit card so you can have the ability to use that kind of financial device without having strong credit. There is generally a yearly fee and typically a monthly fee. In addition, there might also be an interest charge. But when compared to traditional credit card rates for subprime consumers, the interest may actually be lower, so you really have to shop around.
Many times, a personal loan is going to be your best option as a subprime consumer. In this format, you can essentially use it for whatever you need. Recently, many vendors have popped up for this kind of loan, and we would again recommend shopping around. Traditionally, the interest rates are pretty high here, as we've seen rates ranging anywhere from 35% to 365%! Always read the fine print!
We're talking about this last, but the truth is, this is your first and most important mission. Yes, it may take time, but you need to start right away. Start with a credit report from one of the major reporting companies like Equifax, Experian or TransUnion. There are some third-party companies that offer an easier experience with pretty much the same data. Again, we recommend you search and read reviews and not believe someone can just fix this for you with the snap of their fingers; it does take time. The best way to fix your credit is to get another loan and to pay it off, if you can. There is no quicker way to getting back on the road to good credit than to prove you can pay back funds to another borrower, even if those rates may be high. Then again, balancing that risk of high interest loans is not the easiest thing to do.
**We are not financial planners or experts, we are reporters. While we are offering tips above, these are journalistic ideas based on our research. We recommend talking to an expert about any financial decisions you plan on making and understand that this is an entertainment site rather than a financial advisor.