Subprime Personal Loans: What You Need to Know

by Vimal Kishor

Subprime Personal Loans: What You Need to Know

For consumers with less-than-perfect credit, subprime personal loans can provide access to much-needed funds. However, these loans often come with high interest rates and fees. Before taking out a subprime loan, it’s important to understand how they work and consider alternatives.

What Are Subprime Personal Loans?

subprime personal loans

Subprime personal loans are loans offered to borrowers with poor credit scores, typically below 620. Because these borrowers are considered higher risk, lenders charge higher interest rates and fees to compensate.

Some key characteristics of subprime personal loans include:

  • Higher interest rates (often 20-36% APR or more)
  • Higher fees (origination fees up to 8-10%)
  • Shorter repayment terms (often 1-5 years)
  • Smaller loan amounts (typically $1,000 to $10,000)
  • Less flexible qualification requirements

According to Experian, subprime borrowers may pay interest rates 5-6 times higher than prime borrowers for personal loans.

Who Qualifies for Subprime Personal Loans?

Subprime loans are designed for borrowers with credit scores generally below 620. However, exact credit score requirements vary by lender. Some rough credit score ranges include:

Credit RatingFICO Score Range
Excellent720-850
Good690-719
Fair630-689
Poor580-629
Very Poor300-579

In addition to credit scores, subprime lenders may look at factors like:

  • Income and employment history
  • Debt-to-income ratio
  • Recent bankruptcies or delinquencies
  • Assets and collateral

Some lenders have more flexible requirements and may approve borrowers with scores as low as 550 or even 500 in some cases.

Pros and Cons of Subprime Personal Loans

Before applying for a subprime loan, carefully weigh the potential benefits and drawbacks:

Pros:

  • Access to funds for those with poor credit
  • Opportunity to build credit with on-time payments
  • Faster funding than traditional bank loans
  • More flexible uses than credit cards

Cons:

  • Very high interest rates
  • Higher fees (origination, late fees, etc.)
  • Shorter repayment terms
  • Risk of predatory lending practices
  • Easy to get trapped in debt cycle

Top Subprime Personal Loan Lenders

Some of the most popular subprime personal loan lenders include:

  • Avant – Loans from $2,000 to $35,000 for borrowers with credit scores as low as 580
  • OneMain Financial – Loans up to $20,000 for borrowers with scores in the 600s or below
  • Upstart – Uses AI to evaluate borrowers, may approve scores as low as 580
  • LendingPoint – Loans from $2,000 to $36,500 for credit scores 585+
  • OppLoans – Small loans up to $4,000 for borrowers with very poor credit

Always compare offers from multiple lenders to find the best rates and terms you can qualify for.

How to Get a Subprime Personal Loan

If you decide a subprime personal loan is right for your situation, follow these steps:

  1. Check your credit score – Know where you stand before applying
  2. Compare lenders – Research multiple lenders to find the best rates/terms
  3. Get prequalified – See estimated rates without impacting your credit score
  4. Gather documents – Income verification, bank statements, etc.
  5. Submit application – Provide all required information
  6. Accept loan offer – Carefully review terms before accepting
  7. Receive funds – Funding usually occurs within 1-7 business days

Be prepared to provide details on your income, employment, debts, and reason for the loan during the application process.

Alternatives to Subprime Personal Loans

Before committing to a high-interest subprime loan, explore these potential alternatives:

Secured Personal Loans

Using collateral like a vehicle or savings account may help you qualify for better rates.

Credit-Builder Loans

These loans are designed to help build credit and often have more favorable terms.

Peer-to-Peer Lending

Online platforms connect borrowers directly with investors, sometimes offering lower rates.

Local Credit Unions

Credit unions often have more flexible lending standards than big banks.

Cosigner

Having a cosigner with good credit can help you qualify for better loan terms.

Improve Credit First

Taking steps to boost your credit score before applying can help you qualify for better rates.

Impact on Your Credit Score

Subprime personal loans can affect your credit in several ways:

Short-Term Impact

  • Hard inquiry when you apply (typically lowers score by 5-10 points)
  • New credit account added to your report
  • Increased credit utilization ratio

Long-Term Impact

  • Positive payment history can improve score over time
  • High balances may increase credit utilization
  • Missed payments can severely damage credit

According to Bankrate, making on-time payments on a personal loan can improve your credit score by up to 20-40 points over time.

Risks of Subprime Personal Loans

While subprime loans can provide needed funds, they come with significant risks:

Predatory Lending

Some lenders take advantage of desperate borrowers with unfair terms.

Debt Trap

High interest rates make it easy to get stuck in a cycle of debt.

Default Risk

Missing payments can lead to severe credit damage and collection actions.