Personal Finance Advice

You have probably heard the term subprime to describe some of the mortgages that went into foreclosure.  This isn’t a new term within the financial sector, but it has taken on new meaning recently as people start attributing varying definitions to the word. Subprime doesn’t necessarily refer to a loan or credit card that is extended to people with absolutely horrible credit, although these people do fall into this category.  Subprime can also refer to someone who has good credit but may not have an adequate job history or documentation of income.  In other words, you can fall into the subprime category even though you have an admirable credit history. 

What makes an application fall into the subprime category?

Bad credit.  When you don’t pay your bills, or you overextend yourself, you can expect to fall into the category of subprime.  You’ll pay higher interest rates and higher fees because you’re a bigger credit risk than someone who has demonstrated the ability to stay on top of monthly bills. 

Sporadic employment history.  This comes up when applying for mortgage loans and other substantial credit accounts.  Creditors want to know that you will stay employed long enough to pay off your bills, and the only way to predict that is to look at your employment history.  Some lenders go so far as to require that the last two years of your employment have either been with one employer or at least within the same field.

Self-employment.  By itself, self-employment does not immediately force you into the category of subprime.  Problems arise when you haven’t been in business for very long or if your tax returns don’t demonstrate some form of profit.  Creditors know that a lot of small businesses fold within the first couple of years, so if you don’t have more than a year or two under your belt as self-employed, don’t be surprised if your lender treats your application as subprime.

Insufficient income documentation.  Maybe you made a nice profit for the past four years from your business, but you don’t have copies of your tax returns.  Perhaps you work on a freelance or cash basis but have only been doing it for less than a year and you don’t have the tax returns to back up your income claim.  You may still be able to get a loan or credit card, but you’ll be considered subprime.

You don’t have to worry that there will be no lenders willing to approve your application just because you fall into the subprime category.  There is a huge market for subprime lending, so chances are you can find an approval somewhere.  Just be prepared to pay higher interest rates and plenty of fees.