Subprime home loans refers to loans that are offered to borrowers who have lower credit scores and a monthly income that is lower than what is expected on people who apply for conventional home loans. It is specifically targeted to individuals who are not even eligible to be given loans with lower interest rates. Although they benefit those who are excluded from other loans, these loans can set one far much behind by worsening his/her credit. Here are some of the notable disadvantages of subprime loans that one must know before going for them.
1. Higher processing fees and interest rates
Subprime loan processing fees are generally higher because the lenders are always preparing for default of payment by the borrower. In addition, for the same reason they tend to charge higher interest rates and the situation can worsen because lenders have the capacity to repossess the ownership of the house rendering defaulters homeless.
2. Strictness on income
Lenders are also very keen when it comes to the borrower’s income but are not demanding when it comes to one’s credit scores. The condition is that the borrower should show proof of having an income that is able to cover monthly payments stipulated in the loan contract. Therefore, borrowers must provide enough supportive documents to show that they can meet the payment schedule that they have opted for. Lenders usually turn down those without adequate income to support the monthly payments.
3. Much exploitation
Lending companies and banks that offer subprime home loans are aware that the borrower has limited options of being given other loans. Therefore, they take advantage of the situation by offering them home loans so that they can gain much from them. This implies that one must choose a lender who offer multiple alternatives so that he/she is able to go for the one with an interest rate that can be fair to him/her.
4. Pre-payment penalties
Subprime home loans come with pre-payment penalties. This means that in case one refinances or pays off a subprime home loan that he/she had taken before the stipulated period elapses he/she is penalized.