By Ben Luthi
Edited by Michelle TipswordWhat Is a Subprime Loan?
Quick Answer
A subprime loan is a type of loan offered to borrowers with lower credit scores who don't qualify for conventional loans. These loans typically have higher interest rates and less favorable terms.
Subprime loans are offered to borrowers who don't qualify for prime loans due to lower credit scores or limited credit histories. While these loans can provide access to needed financing, they typically come with higher interest rates and less favorable terms than prime loans.
Understanding how subprime loans work can help you decide whether one is right for your situation.
What Is a Subprime Loan?
A subprime loan is a type of credit extended to borrowers considered higher risk by lenders. These borrowers typically have FICO® ScoresΘ below 670 or VantageScore® credit scores of 600 or lower, which places them in the fair or poor credit range. Because lenders view these borrowers as more likely to default, subprime loans carry higher costs to offset that risk.
There are many different types of subprime loans and credit available, including mortgages, auto loans, personal loans and credit cards. While they provide financing options for borrowers who might otherwise be denied, the higher costs make them a more expensive way to borrow.
Read more: What Does Subprime Mean?
How Does a Subprime Loan Work?
Subprime loans function similarly to prime loans in their basic structure: You borrow money and repay it over time with interest. However, several key differences make subprime loans more expensive:
- Higher interest rates: Lenders charge significantly higher rates to compensate for increased default risk. The rate difference can range from a few percentage points to 10% or more above prime loan rates.
- Larger down payments: For secured loans like mortgages and auto loans, lenders often require substantial down payments. Where a prime borrower might not even need to put any money down, subprime borrowers may need to provide 10% to 20% of the sales price.
- Additional fees: Subprime loans frequently include origination fees, higher late payment penalties and other charges that prime borrowers might avoid.
- Stricter terms: Some subprime loans may have prepayment penalties or require collateral, even if you're not buying a home or car.
When comparing subprime loan offers, look beyond the monthly payment. Calculate the total cost over the life of the loan, including all fees and interest charges. A slightly higher monthly payment with better terms may cost less overall than a loan with a lower payment but excessive fees.
Prime vs. Subprime Loan
The fundamental difference between prime and subprime loans comes down to risk-based pricing. Lenders assess your creditworthiness and adjust loan terms accordingly. The more likely you appear to potentially default, the more expensive your loan becomes.
For long-term loans like mortgages, the cost difference can be substantial. A subprime mortgage might cost tens of thousands of dollars more in interest over 30 years compared to a prime loan, even with the same loan amount.
Here's how prime and subprime loans compare:
| Prime Loan | Subprime Loan | |
|---|---|---|
| Credit score requirements | FICO® Score of 670 or higher | FICO® Score below 670 |
| Interest rates | Lower, competitive rates | Higher rates to offset risk |
| Risk to lender | Lower default risk | Higher default risk |
| Typical borrowers | Established credit history, strong payment record | Limited credit history, past credit issues or recent financial setbacks |
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View all of our Best Personal Loans for 2026 to see what you’re likely to qualify for, and the rates and terms you might get.
How Do I Get a Subprime Loan?
Finding the right subprime loan requires research and comparison shopping. Different lenders specialize in different types of borrowers and loan products, so consider several options.
- Check with credit unions. Many credit unions offer competitive rates to members with lower credit scores. Federal law caps most credit union loan interest rates at 18%, potentially saving you money compared to other subprime lenders. However, you may need to secure the loan with savings or other assets.
- Compare online lenders. Some online lenders focus specifically on subprime borrowers and may offer more flexible terms than traditional banks.
- Get prequalified. Apply to get prequalified with at least three lenders. Each lender assesses risk differently, so rates and terms can vary significantly. Experian can help you find offers based on your credit profile without hurting your credit score, potentially giving you access to more options.
Be aware: As you research and evaluate your options, it's important to avoid payday loans if possible. Payday loans typically carry triple-digit annual percentage rates and short repayment periods that can trap borrowers in cycles of debt.
How Do Subprime Loans Affect Credit?
Like any loan, a subprime loan impacts your credit based on how you manage it. Making on-time payments helps build a positive payment history, which is the most important factor in credit scores. Missing payments or defaulting will damage your credit further.
Before accepting a loan, though, confirm the lender reports to all three major credit bureaus—Experian, TransUnion and Equifax. Some lenders only report to one or two bureaus, or don't report at all. Without reporting to all three, you won't get full credit for your responsible payment behavior.
Successfully managing a subprime loan can gradually improve your credit score, potentially qualifying you for prime loans with better terms in the future.
Pros and Cons of Subprime Loans
Subprime loans offer both opportunities and risks. Understanding both sides helps you make an informed borrowing decision.
Pros
-
Access to credit when you need it: Subprime loans provide financing options when traditional lenders won't approve your application. This can be particularly crucial for emergencies or essential purchases.
-
Opportunity to build credit: Responsible management of a subprime loan demonstrates creditworthiness to future lenders. Consistent on-time payments can help rebuild damaged credit or establish a credit history.
-
Multiple loan types available: You can find subprime options for mortgages, auto financing, personal loans and credit cards, allowing you to address different financial needs.
Cons
-
Significantly higher costs: Higher interest rates and fees mean you'll pay substantially more than a prime borrower for the same loan amount. Over time, this can add up to thousands or tens of thousands of dollars.
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Risk of predatory lending: Some lenders target vulnerable borrowers with excessive fees and unfavorable terms. Payday loans and certain subprime products can create debt traps rather than financial solutions.
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Potential for deeper financial trouble: Taking on expensive debt when you're already financially stressed can worsen your situation if you can't afford the payments. Defaulting damages your credit further and may result in repossession or legal action.
Learn more: The Pros and Cons of Subprime Mortgages
Are Subprime Loans Worth It?
Whether a subprime loan makes sense depends on your specific circumstances and available alternatives. Consider both when it might help and when it could hurt your financial situation.
A subprime loan might be worth it if:
- You have a genuine emergency. Critical home repairs, essential medical care or urgent expenses that can't wait may justify the higher cost of a subprime loan.
- You need transportation for work. If reliable transportation is essential to keeping your job and you have no other options, a subprime auto loan may be necessary.
- You're consolidating higher-interest debt. If the subprime loan rate is lower than what you're currently paying on credit cards or payday loans, consolidation could save you money.
- You can afford the payments. You have a stable income and room in your budget to handle the monthly payment without risking default.
A subprime loan might not be worth it if:
- You can wait to improve your credit. Delaying a purchase by six months to a year while building your credit could qualify you for significantly better rates.
- You have alternative options. Family loans, employer assistance programs or community resources might provide better terms or lower costs.
- The payments will strain your budget. If making the monthly payment means cutting essential expenses or missing other bills, the loan could worsen your financial situation.
- You're borrowing for nonessentials. Taking on expensive debt for wants rather than needs rarely makes financial sense when you're already facing credit challenges.
If you decide to proceed with a subprime loan, use it as a stepping stone. Make every payment on time and work simultaneously to improve your credit so you can refinance to better terms or qualify for prime rates on your next loan.
How to Improve Your Credit Score to Qualify for a Prime Loan
Becoming a prime borrower takes time and consistent effort, but the long-term savings make it worthwhile. Here are key strategies:
- Pay your bills on time. Payment history accounts for 35% of your FICO® Score, making it the most important factor. Set up automatic payments or calendar reminders to ensure you never miss a due date.
- Reduce your credit utilization. It's important to keep credit card balances below 30% of your available credit, and ideally below 10%. Take steps to pay down existing balances and create a budget to avoid racking up new debt.
- Avoid opening unnecessary accounts. Each new credit application triggers a hard inquiry, which can temporarily lower your score by a few points. Only apply for credit you genuinely need.
- Maintain older accounts. Length of credit history matters, so keep your oldest accounts open and in good standing, even if you don't use them frequently.
- Check your credit reports regularly. Regularly review your reports from all three credit bureaus for errors or fraudulent accounts. You have the right to dispute any inaccuracies you find, as they could be dragging down your score unfairly.
- Diversify your credit mix. Having different types of credit—such as a credit card and an installment loan—can benefit your score. That said, only take on accounts you can manage responsibly.
Frequently Asked Questions
The Bottom Line
Subprime loans provide access to financing when traditional lending options aren't available, but they come with significantly higher costs. Before accepting a subprime loan, carefully evaluate your ability to repay, compare multiple lenders and consider alternatives.
If you do take out a subprime loan, use it as an opportunity to build a positive credit history. Make every payment on time and work to improve your credit score so you can qualify for better terms in the future. Monitor your credit regularly with a free credit report and FICO® Score from Experian to track your progress and identify areas for improvement.
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About the author
Ben Luthi
Ben Luthi has worked in financial planning, banking and auto finance, and writes about all aspects of money. His work has appeared in Time, Success, USA Today, Credit Karma, NerdWallet, Wirecutter and more.
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