Shopping for a subprime loan
By Dana Dratch • Bankrate.com

Where does a smart consumer shop for a subprime loan? The same places you go for a prime loan.

One of the biggest mistakes borrowers can make is to set out shopping for a "subprime" loan, says Norma Garcia, senior attorney for Consumers Union. Instead, you want to shop a variety of lenders and get the best rate you can, regardless of how that lender classifies you.

If you look specifically for subprime loans or lenders, you could be outsmarting yourself. "Lenders can offer you only the products they have available," says Garcia. But a lot of them have subprime affiliates, so they might be able to help you out.

The definition of "subprime" will vary by lender. By marketing yourself only to subprime lenders, you don't even have the option of a better deal. And the lender is under no obligation to tell you that you could get a lower rate.

"One of the things we find is that borrowers can be charged different rates depending on which door they walk into," says Allen Fishbein, director of housing and credit policy for the Consumer Federation of America.

Go through the wrong door, and you risk getting a more expensive loan, says John Taylor, president and CEO of the National Community Reinvestment Coalition. "If you walk into a subprime branch, they will not say, 'You've got an 800 (credit score), you've got to go uptown.'"

Ready, set, shop
Start with the bank or credit union where you already have an account relationship, says Jean Ann Fox, director of consumer protection for the Consumer Federation of America. Find out what they offer and see if you qualify. If you know your actual credit score, you can ask them for some unofficial advice on the terms they might be able to give you. This approach would allow you to start shopping without having creditors make inquiries on your credit report. (Inquiries lower your credit score. But if you're shopping for a home or auto loan, all inquiries within a 14-day period are supposed to be treated as one query, which helps you minimize the impact.)

Next, consider past relationships such as banks and credit unions that you have had good dealings with previously. Add to the mix financial institutions that you've researched that seem to have a good track record.

"You really want to shop the prime lenders," says Michael Stegman, professor of public policy and director of the Center for Community Capitalism at The University of North Carolina at Chapel Hill. Many lenders now have subprime divisions. If you go in for a prime loan and don't qualify, they may be able to refer you to another part of the same company. Also, some lenders have community-development requirements.

Consumer advocates warn that subprime borrowers are more likely to be offered disadvantageous terms. So it can literally pay to shop and compare. "If you're in a marginal area, you have to do that extra bit of due diligence," says Robert Manning, professor at Rochester Institute of Technology and author of "Credit Card Nation: The Consequences of America's Addiction to Credit."