I have the answer to this age old question. There are two ways that a sub-prime borrower may benefit from this.
The first is in the rate. A subprime borrower is someone that has not so perfect credit
including but not limited to:repossession,Bankruptcy,tax-leins, just to name a few there is considerably more risk to
do a loan for someone in this position. Based on the credit history, they show that they have already had
situations that caused them to default on payments. The Rate on a sub-prime loan is much higher than a
conventional loan due to the risk involved. With the payment so high,it makes it harder for the borrower to ratio
(qualify). By adding a prepay penalty- we are able to pass on a reduction to the rate . This is because the
investor will offer a better rate if they are guaranteed that they will be able to service the loan for a given amount
of time.The second advantage is that it is normally a 2-3 year pre-pay penalty. If you understand how the fico
system works, you know that your credit score is based on your last 2yrs credit history. The prepay penalty
allows the borrower the chance to rebuild their credit over the two years. This will raise their score and may allow
them to refiance into a convention loan program with a better interest rate.
;)
;)
