| It's 'buyer beware' on subprime loans |
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| "A modest amount, 20 to 30
points, could reduce how much they are charged," says Fishbein.
Third, pull your report and make
sure your score reflects your true credit history. "A lot of times people
fall into subprime category because information on their credit report is not
correct and is depressing their credit scores," says Norma Garcia, a senior
attorney for Consumers Union. "Make sure it's consistent and accurate." Full
steam ahead
If waiting to boost your score is impractical and everyone
seems to see you as subprime, then you want to shop carefully. Some lenders will
treat you the same as a prime customer. Others will assume that if your credit's
blemished, you aren't that good with managing money and may not read the fine
print. And some will assume that if you're not good with money, you're a bigger
risk for them. But if you're getting a subprime loan, it's
even more important to read the fine print. If you've had money trouble in the
past, you want to be extra careful not to sign anything that will cause more problems. Subprime
borrowers expect to pay higher APRs, so it pays to compare. And it's the terms
that make it subprime, not the lending institution. So don't let the name on the
door fool you. "Just because you have a traditional or
prime loan from a lender doesn't mean you can't get a subprime product from the
same lender," says Manning. "People tend to get lulled into complacency
that they won't get ripped off." You also need to look
out for something that sounds too perfect. "If an offer sounds too good to
be true, it is," says Manning. "If you know that you're getting 22 percent
rates on credit cards, and all of a sudden you're getting a zero-percent credit
card, run. It means you're going to be getting a lot of fees." If
you're shopping for a home or auto loan, ask about any and all fees upfront. If
there seem to be a number of them, that's not a good sign. Your credit score means
the lender could have a slightly higher risk in making the loan. But the cost
of filling out the paperwork shouldn't change. Shop around. Limit
your risk
Lenders are all about limiting their risks. You've got to
do the same. Terms that may be benign for prime borrowers can sound the financial
death knell for some subprime customers. Avoid balloon payments
and prepayment penalties. Balloons set up a financial crisis. If you can't make
the cash, you're out of luck. Prepayment penalties punish
you for improving your finances. If you take a subprime now, but your situation
is improving and in two years you qualify for prime, you have to pay the penalty
to your old lender. For subprime borrowers, these clauses
can often become more than paperwork details.
Balloon payments increase the likelihood of default
by 46 percent, according to Michael Stegman, professor of public
policy and director of the Center for Community Capitalism at The
University of North Carolina at Chapel Hill, who conducted a recent
study of subprime mortgage refinance loans. Prepayment penalties
will raise the odds by 15 percent to 20 percent, depending on the
terms.
But what tends to hurt subprime refinancers the most?
Adjustable-rate mortgages, says Stegman. In his study, adjustable-rate
refinance borrowers had a 49 percent greater chance of losing the
home in foreclosure.
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