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Haunted by 619? Get a subprime loan

Everyone wants to qualify for loans at the lowest interest rates and with the most favorable conditions, but for those with severely blemished credit reports, the odds of doing so are rather bleak.

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Like the lost soul in the popular TV commercial, having a 619 credit score is not great, but it's also not the end of the world. If you fall into that category with a credit score dipping precariously below the 620 mark, subprime lenders who offer loans with higher interest rates may be your best option for buying a home, refinancing or opening a line of credit. However, you will have to pay the price.

"There's a place in the market now that allows people with either bruised, blemished or no credit to find a way to get some financing," says Catherine Williams, vice president of financial literacy for Houston-based Money Management International.

While the subprime market may have evoked images of a seedy broker fielding rejects from major lending institutions in years past, the market today has become so profitable that such industry giants as Chase Manhattan, Bank One and Wells Fargo have opened subprime divisions. Along with the large banks, you can get a subprime loan from such entities as credit unions, mortgage brokers, mortgage companies and payday lenders. According to the Federal Reserve, the number of subprime mortgage loans issued grew seven-fold between the years 1994 and 2002.

The subprime lending industry has been under fire for targeting certain groups of minorities, including African Americans and Latinos, who both are more likely to have subprime loans than whites. Federal regulators recently said they would investigate a number of subprime lenders across the country to make sure their loans are not discriminatory.

Studies also have shown that consumers with subprime mortgages are more likely to go into foreclosure. A study released this year by the Center for Community Capitalism at the University of North Carolina at Chapel Hill found that the percentage of homeowners with subprime loans that had gone into foreclosure in the fourth quarter of 2003 was 10 times higher than the rate of foreclosure among homeowners with prime loans.

Who needs them?
It isn't only people who have low credit scores who may be interested in borrowing from a subprime lender.

"People who have trouble documenting their income because they're self-employed need subprime loans," says Janette E. Jones, mortgage consultant for American Home Mortgage in Bethesda, Md. "People who are looking for creative financing or who need creative ways to structure their finances and payments need subprime loans," she adds. Think interest-only and some other balloon-payment loans.

However, you're going to pay a higher interest rate for the loan, which isn't unreasonable since subprime lenders are taking a larger risk on you if you have less-than-impressive credit or little income documentation.

Even if your credit rating isn't as high as you'd like it to be, don't assume the only loan you'll qualify for is through a subprime lender.

Next: "You've got to shop around."
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