Lending institutions rely heavily on a borrower’s credit score when considering whether to extend credit or not. This score not only determines your eligibility for a loan but also influences the interest rate you’re offered. However, it is not the only factor lenders consider. Understanding your borrower risk profile is equally important. This guide will help you understand the 5 borrower profiles you need to know: from subprime to super-prime.
Decoding Your Borrower Risk Profile
Credit score, a figure that ranges between 300 and 900, significantly impacts how lenders perceive your credit risk. Credit bureaus help lenders make more informed decisions by categorizing people into different credit risk groups.
These groups differ among credit bureaus due to variations in credit scoring systems, ranges, and names. However, according to TransUnion’s CreditVision risk score system, your profile can fall into one of the five categories discussed below.
Subprime Borrowers
If your credit score lies between 300 and 639, you fall into the subprime category. This is typically regarded as a bad or very poor credit score.
Near Prime Borrowers
With a credit score ranging from 640 to 719, you’re classified as a near prime borrower. This reflects a poor or fair credit score.
Prime Borrowers
Prime borrowers have credit scores between 720 and 759, which is viewed as a good or average score.
Prime Plus Borrowers
If your credit score lies between 760-799, you belong to the prime plus category. This is considered a very good credit score.
Super Prime Borrowers
A credit score of 800 or more places you in the super prime category. This is an excellent credit score.
Credit bureaus consider several factors to determine your borrower profile. These include your payment history, credit utilization, type and age of credit, and negative marks such as collections, hard inquiries, or legal items on the public record section of your report like a judgement, bankruptcy or consumer proposal.
Understanding Subprime Lending Options
Subprime and near prime borrowers often find themselves in difficult financial situations, making them vulnerable to predatory lending options such as high-interest installment loans, payday loans, or high-ratio private mortgages.
For example, consider a loan with the following terms:
Amount borrowed: $5,500
Interest rate: 46.9%
Cost of borrowing: $6,575.15
Total owing: $12,075.15
Many lenders specialize in risky subprime loans with high interest rates. Unfortunately, the cost of these loans is often hidden in fine print and becomes apparent only after submission of the application. Some subprime lenders even use predatory lending practices like publishing teaser rates to attract borrowers.
The Risks of Borrowing Money
Borrowing involves using someone else’s money for your immediate needs or wants, with a commitment to pay interest until the loan is repaid.
As a borrower, you also take on certain risks:
- Reduced future spending power as debt payments consume a higher percentage of your income.
- The risk of defaulting on loans, which could lead to collection calls or wage garnishment
- The possibility of ending up so deep in debt that bankruptcy or a consumer proposal becomes inevitable.
It’s crucial to understand these risks before taking on a loan. Make sure the terms fit within your budget, and avoid using credit as a means to balance your budget. If you’re already in debt, seek professional help.
In conclusion, understanding the 5 borrower profiles you need to know: from subprime to super-prime, can help you navigate the complex world of borrowing and make informed decisions to improve your financial health.
