What is a sub-prime loan?

A sub-prime loan is a loan that's granted upon people who do not qualify for conventional loans due to their income or high-to-value ratio, and if they have bad credit. There are many mainstream financial institutions are getting into sub-prime lending, which some affiliates under different brand names. When it comes to industry sources, in 2003, sub-prime mortgages in the U.S. added up to about $300 billion, or eight to 10 percent of the total mortgage market.

What sub-prime loans offer

Sub-prime loans differ from conventional ones in important ways:
The interest rate is usually higher than that offered to customers who are considered a good credit risk. The loan may include an excessive number of origination points. Points typically are calculated at one percent of the
loan amount, in addition to standard fees and interest, to compensate the lender for the risk of the loan. The repayment terms often have larger than average prepayment penalties that must be paid at the end of the loan.

Some things to remember before you agree to a sub-prime loan:

Investigate your eligibility for prime-loan financing as soon as possible, so you know where you stand. You can do this by clicking here to get mortgage quotes from up to four lenders.

Never agree to a solicitation without checking out your other options. If the deal sounds too good to be true, it
probably is.
Ask if the lender is licensed.
Read all the fine print and ask for an explanation of all fees and conditions.
Make the lender explain any insurance costs.
Make sure you're not just paying the interest, but the principal, too. Otherwise you may end up having to make a
lump-sum payment at the end of the term.
Bear in mind that you have the right to cancel many loans within three days. This is called the right of rescission.
Call a financial advisor for clarification if you are confused.