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Definition: A loan made to a borrower who does not qualify for prime market interest rates because of credit problems or other deficiencies. A subprime loan charges a higher interest rate and/or greater fees.
What does this mean for you?: Subprime loans service consumers who have bad credit. Subprime loans can cost you more in the long run, sometime thousands of dollars because of they carry higher interest rates. While subprime loans may present your only option for funds, you should explore other options before committing to a loan that could only serve to damage your finances further. The best option is to avoid letting your credit fall to a point that subprime loans become your only option. If possible, take actions to improve your credit or consider a cosigner to help you secure a loan with more favorable terms. If you decide to commit to a subprime loan, do your research to make sure the lender is reputable. Additionally, always fully understand the terms of the loan to make sure you do not fall victim to a predatory lender.
Source: American Bankers Association