Settlement Playbook with Subprime Creditors

By Courtney Dodson

Characteristics of subprime creditors

A subprime creditor is known for offering loans to individuals who may not qualify for loans from other lenders. Subprime borrowers typically have credit scores that are below average and are seen as a bigger risk for defaulting on their loans. Because they lend to consumers who are considered risky, subprime creditors offer starter credit cards and credit cards that can help consumers build credit and raise their scores. These credit cards usually have lower credit limits and higher interest rates. The interest rate for subprime credit cards can range anywhere from 17-26%.

Subprime creditors and delinquency

Different types of creditors vary in the way they approach delinquency, which is when a borrower has ceased payments toward a debt. Delinquency can lead to many negative consequences, including a damaged credit report, inability to take out future loans (including a mortgage), and possible loss of collateral or assets. 

A few key characteristics for subprime creditors dealing with delinquency include:

  • Settlement percentages range from 50% to 70%.
  • After 120-180 days of delinquency, the bank will likely sell your debt to a debt buyer. 

If you have a loan from a subprime creditor, you’re unlikely to negotiate a payoff deal while remaining current with your payments. If you become delinquent on those payments, however, creditors usually become open to debt settlement options. Your debt is considered an asset for a creditor when you successfully make payments toward it, but if you can no longer make those payments, the creditor has to write the debt off as a loss instead. 

If you have multiple delinquent credit card accounts, it may be beneficial to speak with a non-profit credit counseling agency about consolidating them into a single, reduced payment. If you’re struggling with one subprime credit account, however, you can reach out to the creditor directly to resolve the account with them. The earlier you talk to the subprime creditor about payment options, the better—even if you’re only a week late on your payment. 

Together, you and your subprime creditor can discuss hardship plans. In this type of negotiation, you agree to a reduced monthly payment plan for a specific time period—usually from three to 12 months. Once the allotted time is up, you’ll return to the original interest rate and minimum payment from your credit agreement. Lower monthly payments are accomplished by the subprime creditor reducing your interest rate, whether temporarily or long-term. Monthly payment reductions are usually granted for a shorter duration when you negotiate without a credit counselor, though in some cases, a lower monthly repayment plan may still be granted for the lifetime of the balance. 

In a situation where you are unable to pay even a reduced monthly minimum due to unemployment, exhausted savings, or any other reason, be aware that subprime creditors are known for taking legal action. In many cases, a delinquent balance of as little as $400 will trigger a lawsuit for an attorney working for a subprime creditor. It’s important to save money and reach out to negotiate and resolve your debt at your earliest opportunity. When they review your information and reasons for nonpayment, be transparent about your financial distress. Avoid talking about future credit goals or anything that could allude to an ability to repay your debts, because this causes you to appear collectable and could hinder negotiations. 

Once your debt reaches six months past-due, any credit damage has already been done. At this point, the most advantageous move is to negotiate the lowest possible payoff amount. Realistic settlement percentages offered by subprime creditors range between 50-70%. These types of creditors do not typically settle for less than 50%. 

Risks and benefits of working with subprime creditors

Obtaining a loan from a subprime creditor can be helpful for borrowers with lower credit who don’t qualify for other loans or who want to rebuild their credit. Once an account becomes delinquent, the hardship plans offered by some subprime creditors can also be beneficial by making monthly payments more affordable for a period of time. 

A subprime loan is also likely to include a higher interest rate than other credit card companies. If you fall behind on payments and take advantage of a payment reduction period, subprime creditors are often extremely litigious—suing over as little as $400 sometimes. 

Manage your expectations for repairing your credit report with a subprime creditor as well. While most creditors report a zero balance owed after agreeing to a settlement and receiving the money, some subprime creditors have been known to report a balance still owed to them. For example, if your delinquent balance is $8,000 and both parties agree to a $4,000 settlement, the creditor might still report $4,000 due on your credit report after you pay—which can be difficult to have removed. 

If you need help connecting with your creditors, Kredit can help.

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