- Subprime Customers:
- Subprime borrowers are individuals with credit scores below a certain threshold, typically around 620 or lower on the FICO credit scoring scale.
- These borrowers may have a history of late payments, defaults, bankruptcies, or other negative credit events.
- Subprime customers represent a higher credit risk to lenders, as they have demonstrated past difficulties in managing credit responsibly.
- Lenders typically charge subprime borrowers higher interest rates and may require additional collateral or a cosigner to mitigate the increased risk of default.
- Near-Prime Customers:
- Near-prime borrowers fall between prime and subprime categories in terms of creditworthiness.
- These borrowers typically have credit scores slightly below prime levels but higher than subprime levels, generally ranging from 620 to 700 on the FICO scale.
- Near-prime customers may have some blemishes on their credit history, such as a few late payments or moderate levels of debt, but they generally have fewer serious credit issues compared to subprime borrowers.
- While near-prime borrowers pose a lower credit risk compared to subprime borrowers, they may still be subject to higher interest rates and less favorable loan terms compared to prime borrowers.
In summary, the key distinction between subprime and near-prime customers lies in their credit profiles and levels of credit risk. Subprime borrowers have lower credit scores and a history of credit problems, while near-prime borrowers have slightly better credit profiles but may still have some credit challenges. Lenders assess these factors when determining loan eligibility and setting terms and interest rates for borrowers.