Near Prime Loans
In the months following the economic downturn of 2008, lenders tighten their lending practices as they felt the risk of lending to anyone without stellar credit had greatly increased. Prime consumers (people with high credit scores) became the only ones able to qualify for the financing they wanted.
But, as time has passed and more and more consumers have started to get their finances back on track by consistently paying back their debts and learning to live with less credit, they’ve become what the financial world has deemed, near prime borrowers. These borrowers definitely have better credit scores than subprime borrowers but not quite as high as prime borrowers. Near prime borrowers don’t have perfect credit histories, some may have had a few credit issues in the past, but they’re able to pay back their debts on time and in full, much like prime borrowers do.
Prime, Near Prime and Subprime
Banks and other lending institutions like to categorize borrowers based on whether or not they think the borrower will be able to pay back their loan on time or at all. Before the economic downturn, lending restrictions weren’t so tight. Post economic downturn, lenders became even more concerned with the risk associated with lending to borrowers in the subprime and near prime categories. All of a sudden lenders only wanted to work with prime borrowers and no one else was able to get the loans they needed.
- Prime. A consumer who can be categorized as a prime borrower typically has a credit score of 720 or higher.
- Near Prime. There is no generally agreed upon range for the near prime borrower, but obviously their credit score typically falls somewhere between 720 and 660.
- Subprime. A consumer who is categorized as a subprime borrower has a credit score below 660.
Near primer borrowers are often desperate for loans to finance important purchases like houses and vehicles but are continually turned down because more traditional lending institutions are still in the post economic downturn mindset, where risk is something to be afraid of.
Learn what to do when the banks say no.
Most near prime consumer’s financial issues are in the past and while they may still show up on their credit reports, these consumers really are financially stable enough to handle the loans they need and want.
The Good News, Things are Changing
Generally speaking most near prime consumers are still being rejected for the loans they want and typically for reasons that are either out of their control or from a long time ago. Unfortunately issues stay recorded on a credit report for up to 10 years (learn to protect your credit report here), therefore potentially negatively impacting your credit score for the same amount of time. This in return could prevent you from being approved for a loan. When a lender takes the time to look beyond a credit score they often find that a near prime consumer is in fact a reliable borrower.
The good news is that this trend is slowly changing. Right now the average near prime Canadian consumer:
- Has the ability to pay back a loan in full and on time
- Is gainfully employed
- Has an income of $50,00 a year or more
- Has a significant amount of money in their chequing account
And fortunately for near primer consumers, lenders have started to take notice and are now looking at new and different types of data to assess risk and reliability:
- Cellphone bill records
- Utility record
- Bank account records
- Rental histories
If lenders provide near prime consumers with the opportunity to get the financing they need, these consumers will then have the opportunity to improve their credit over all and move into the prime borrower category.
Will you be Approved?
It’s hard to guarantee whether or not you’ll be approved for a loan if you’re in fact part of the near prime consumer category. The lending market changed a lot in 2008 and it continues to change today. The trend of approving near prime consumers for loans continues to grow and so will your possibility of being approved.
Some lending institutions have already realized the vast opportunities that could be afforded to both themselves and a large group of Canadian consumers, should they start to approve more and more near prime borrowers.