The process of qualifying for a mortgage or car loan can be difficult if your credit rating is low. Lenders review your credit report and rate it according to the score. Rating is a process that places credit scores in a category from "A" to "D" or "F," depending on the scoring model a credit-reporting agency uses. If your credit falls in the "D" category, you are a candidate for a "D" credit, or subprime, loan.
Identification
Credit rating agencies like TransUnion, Experian and Equifax use one of two models to rate credit. The Fair Isaac Corporation, or FICO, model includes a scoring system from 300 to 850 and a rating system that places scores in categories from "A" to "D." Using the FICO system, "D" credit is a score below 575 points. It is the lowest possible rating. Another model agencies use is the VantageScore. This model includes a scoring system from 501 to 990, and places scores in categories from "A" to "D" and adds an "F" category as the lowest possible rating. Using the VantageScore system, "D" credit is a score between 601 and 700 points.
Features
"D" credit loans are subprime loans. The U.S. Department of Housing and Urban Development defines subprime loans as high-risk loans for people with limited or "blemished" credit histories. These loans primarily feature high interest rates and in some cases, additional fees. For example, a person with a credit score of 720 qualifies for a mortgage at 5.5 percent, but if your credit score is at 580, or in the "D" category, the interest rate for the same loan could be three percentage points higher. Over the course of a 30-year, $100,000 mortgage, you will pay an additional $72,000 in interest.
Benefits
Despite the higher interest rates associated with "D" credit loans, there are benefits as well. When your credit rating disqualifies you from conventional loan financing, "D" credit loans give you purchasing power. Once you get the loan, making on-time payments can help restore your credit rating faster than you could otherwise. When your credit rating rises to a level that qualifies you for a conventional loan, you can refinance at a more favorable interest rate.
Considerations
Subprime loans are becoming difficult to get. CNN Money reports that lenders such as Washington Mutual and Wells Fargo are cutting back or eliminating them altogether due to their high level of risk, as of May 2010. If you are a "D" credit borrower, this may mean greater reliance on lenders with "consumer," "finance" and "acceptance" in their names, which often is indicative of subprime lenders.
Warning
The U.S. Department of Housing and Urban Development warns that some "D" credit or subprime lenders are predatory. Predatory lending is unethical. In most cases, however, predatory lending is not illegal unless loan terms violate federal or state lending laws, or you can prove you were deliberately mislead or are the victim of fraud. The HUD recommends that you have a real estate attorney or a HUD-approved housing counseling agency look over your purchase contract and all loan documents before signing anything.
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