What is Subprime Credit?
Subprime credit refers to individuals whose FICO credit score is under 620. The FICO credit score ranges from 300-850, with higher scores reflecting a higher creditworthiness. A higher credit score is obtained by paying back loans on time, the length of time that credit cards and other credit lines are open, keeping balances low on your credit lines, and avoiding applying for too much new credit all at once. The opposite is true when lowering your credit score. Once a credit score is reduced below 620, the borrower is considered a subprime consumer. This is a red flag to lenders when an individual applies for a loan. It is much harder to get approved for a loan with a subprime credit score, and the terms (credit limit and interest rate) will be worse than for a borrower with prime credit. This is because lenders know by experience that borrowers with subprime credit are more likely to default on their loan, which forces a lender to increase the interest rate of loans given to these customers.
One way borrowers can obtain better terms on their loan is by offering collateral, which is something of value that if offered to the lender in the case that the borrower defaults on the loan. Title lenders are common examples of collateral lending. Borrowers place the title of their car as collateral to obtain a loan, which allows the lender to be at ease knowing that they will be able to recover a portion of the loan if the borrower defaults.