Let’s take a look at the differences between prime and subprime lending in Canada.
Looking to take out a loan, but wondering what kind of loan you’ll qualify for? The biggest factor is your credit rating, so if you’re not sure what your rating is, be sure to check out our article on the subject. If you’ve heard the terms “prime” and “subprime” before in the context of finances, then you might be wondering what they mean. These terms reflect the nature (and overall quality) of a loan. When you sit down with a lender and they use this terminology, it somewhat describes the type of loan you’re qualifying for.
What is Prime Lending?
This is a general term referring to conventional loans for people who meet the fundamental lending criteria. For example:
- Your credit score is 650 or above – lenders will look at this number to determine whether you qualify for a prime or subprime loan
- You have no prior vehicle repossessions – this is another big one; if you’ve had a vehicle repossessed before, lenders might not trust you with another vehicle loan
- You’re making an income of at least $1,800 per month (before deductions or taxes)
The general idea here is that lenders want to know whether you’ll be able and willing to pay off a new loan plus interest. If so, then you’ll likely qualify for prime lending, which essentially means a loan with a longer term and lower interest rate. You’ll want to get one of these loans if you qualify, because prime loans tend to be considerably less expensive. This is simply because lenders are much more likely to trust that you’ll be able to pay off your loan.
If you’re interested in qualifying for a prime loan, but you’re thinking you won’t be able to, then consider building or rebuilding your credit.
What is Subprime Lending?
Some people might not meet the above criteria, and subprime lending caters to this segment of the market. You’ll probably be stuck with one of these loans if you don’t fulfill the qualifications above. There are a number of other things that can affect your credit and your ability to qualify for a prime loan:
- New Canadian residency
- Maxed Credit Cards
If you believe you fall into one of these categories, or if you’re concerned about your credit, then you certainly can speak with your bank or credit union, or one of the Finance Experts here at Used Cars Canada. We’ll be happy to help find the best course of action for you.
The Big Differences Between Prime and Subprime Lending
There’s a term lender use quite frequently: delinquency rate. This term refers to a borrower’s perceived likelihood to default on a loan or miss payments. These particular borrowers represent a risk to the lenders, and it’s this risk that really affects whether a borrower will qualify for prime or subprime lending.
The stricter criteria for prime loans ‘weed out’ these higher-risk borrowers. And the higher interest rates that come with subprime loans is how lenders make up for having less strict criteria. The higher interest rate helps to mitigate any potential loss they might experience over the course of your paying off the loan (say, because of missed payments). Higher risk, higher interest rate.
Speaking of risk, prime loans have a lower risk to the borrower too because of their lower interest rates and lesser penalties for defaulting or being late on payments. This is, perhaps, one of the biggest differences between prime and subprime lending–it’s the one that affects you, the borrower, the most.
What to Do with This Information
So what now? If you’re wondering which type of loan you’d qualify for, then you might want to start with getting a copy of your credit report along with your credit score. If you’re interested in getting a prime loan and you’re sure that you’d qualify, then you can contact us with confidence and get started right away!
If your credit is suffering and you’re interested in qualifying for a prime loan, then take a look at our blog posts on the subjects of building and rebuilding your credit. If you need a vehicle right away, then you can learn about how to go about getting a loan with bad credit.
We hope we’ve helped you answer the question, “what are prime and subprime lending” and that now you have a better idea of the differences between prime and subprime lending. Please, contact Used Cars Canada should you have any questions we haven’t answered already!