For those of you following the mortgage crisis that has enveloped America and the rest of the world you’re probably all talking about those subprime mortgages and the people who have them. Some of you may even know someone who has one and has defaulted on their mortgage causing them to sell far below their current house value or even foreclose.

What you may not know is that the subprime mortgages are mortgages whose interest rate is below federal prime level (although this may be the case in some mortgages) it usually means that mortgages were given to people who couldn’t qualify under normal terms. Maybe their credit score was bad, so they were given a rate to get them through the next 3 to 5 years, called an ARM. Once they got on their feet, got their credit back to normal they could get a fixed rate afford their house.

Problem is, these borrowers weren’t given a financial education to go along with this borrowing that took place. Whose fault is that? Who knows.

Most traditional mortgages require you to put 20% down to cover the bank in case they have to foreclose. The bank then has at least 20% as an asset to cover any sudden downswing in the housing market. These subprimers were able to get loans for both the 20% down and the 80% remaining by paying a small fee called mortgage insurance. These insurance rates, usually enough to deter borrowers from going 80/20 loan routes were lowered and allowed risky credit apps.

The list goes on about what was wrong with this lending. But the bottom line is that subprime doesn’t mean just below prime rate, usually it means people with risky credit scores getting in way over their heads.

When you are applying for a loan or you are considering buying something on a loan, that thing that you will be most concerned with is the interest rate. Chances are you will look to receive the banks best rate on the loan you want. The rate you receive however is likely to be determined by many factors including your creditworthiness. You might say that the word “rate” has taken over the lives of many consumers. Your personal finance can be affected by rates in a strong way.

If you are considered a creditworthy customer then the bank may lend to you at what is call their Prime rate. This in a way is the banks more favorable lending rate. The figure varies from one bank to another; and oftentimes, banks would revise the rate every so often. This rate, however, is regarded as a benchmark for other interest rates for other loans like mortgages, variable rate loans, student loans, and home equity loans. Today, the Wall Street Journal Prime Rate controls the market. Understanding how this rate works and how it controls the system might help you understand consumer’s interest rates as well. If you are applying for a new credit card or a car loan, this rate would have effect in the interest rate that your loan would be charged with.

It might be interesting to know that the reference for consumer’s interest rates is the prime rate. You could say that it functions as a base rate. Oftentimes, it moves along with the current market interest rates and trends. So, the next time you are thinking of applying for a car loan and you are wondering what your interest rate would be, you should check out the prime rate. This would help you decide in whether your personal finance can take in the loan.

Every once in a while you will come across advertisements on “all-time” low mortgage rates. Most of the time, these type of mortgages are given to people with good credit standing and control of their personal finances. But what if your credit score is not something that you can be proud of? How do you get your mortgage?

In cases like this, people would usually resort to a subprime loan since they cannot get loans with prime rates.

What are Subprime Loans?

Subprime loans are offered to individuals who have less than attractive credit history or scores. When you cannot qualify for the prime rate financing, it is highly unlikely that you will get the kind of loan that you want. Mortgage companies have exact requirements for prime mortgage loans. Basically, approval for loan despite bad credit score is the classic feature of a sub prime.

What is the drawback to these kinds of loans? Since financing companies know that loan default rate is very high when you have bad credit score, they usually charge high interest rates for subprime loans. This often translates into a bad personal finance setup for many people. Usually, however, the interest rate varies depending on how bad your credit score is.

Selecting a Lender

You might not be able to do anything about your credit score at the moment, but you have a choice as to your lender. There are companies that primarily specialize in these types of loans. There are traditional mortgage companies that are venturing into subprime loans. Make sure that you place a quote request with various lending companies before settling with one. By doing this, you may still get a great deal despite your credit score. You may still minimize the effects to your personal finance.

One key point however is that you must pay up your monthly installments on time or risk losing your property.