Key Takeaways
- B/C loans target borrowers with low credit scores or little credit history.
- These loans typically feature higher interest rates due to increased risk.
- Borrowers may benefit from B/C loans by improving their credit score with timely payments.
- The Dodd-Frank Act aims to prevent predatory lending practices for such loans.
- Interest rates for B/C loans are higher than A-labeled loans but lower than D-labeled loans.
What Is a B/C Loan?
A B/C loan is financing aimed at subprime or thin-file borrowers who often can’t qualify for traditional “A” loans from banks. These loans, including personal loans and mortgages, are usually offered by alternative lenders and come with higher interest rates and fees as the trade-off for access to credit.
Even with less favorable terms, a B/C loan can serve as a stepping stone if on-time payments help build credit and improve future borrowing options.
Detailed Insights into B/C Loans
Borrowers in the B/C-labeled loan category often have poor payment records (lots of missed or late payments), credit history (bankruptcy), or they may be carrying an excessive amount of debt. However, they may also be what the industry calls thin-file borrowers: Consumers with no or limited credit history from which to generate a credit score. Young people or those who are new to using credit cards in their own name often fall into this category.
Despite their less-advantageous, even predatory, terms, B/C-labeled loans can often be a good way for borrowers to obtain financing while also improving their credit score and credit history (assuming they make faithful repayments). All this can help them to receive more favorable financing terms in the future.
Key Characteristics of B/C Loans
B/C loans can generally be classified as subprime loans. They have a greater default risk for the lender since the borrower’s credit score is generally 650 or below, a ranking that puts them in the fair, poor, or very poor category, as designated by VantageScore, the scoring system developed by three credit rating agencies, Equifax, TransUnion, and Experian. According to data from Experian, 69.10% of borrowers fit into these categories.
A growing number of alternative credit agencies and alternative lenders have been developing in the credit market to serve these types of borrowers. Lenders and credit reporting agencies that focus on thin-file borrowers will seek to analyze alternative types of payment data such as cell phone bills, utility bills, rent payments, and even public records.
Because of the additional credit risk associated with B/C loans, lenders will usually require higher fees and interest rates than those mandated for A-labeled prime loans. Annual interest rate levels generally run in the 25% to 75% range for personal B/C loans.
B/C loans, however, are not the toughest in town. In fact, their rates are generally more favorable than D-labeled loans. This category can encompass payday loans from lenders that charge annual interest rates up to 400%. B/C loans will typically have interest rates that are relatively higher than A-labeled loans but substantially lower than D-labeled loans.
Important Considerations for B/C Loan Borrowers
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 instituted new lending requirements for all lenders. Basically, these tightened standards for loan underwriting across the industry and provided greater incentives for higher quality loans. The Act also created qualified mortgages, which are mortgage loans meeting certain requirements that can receive special protections and more favorable terms in the secondary market.
As a result, A-labeled loans are encompassing a greater majority of the credit market. While the act’s regulations can make it tougher for consumers to get financing, the act also put in more protections against predatory lending, prohibited prepayment penalties in certain instances, and generally mandated clearer, more transparent terms in loan and mortgage contracts.
Fuller disclosure can be especially important with B/C loans. Often, a borrower might start out with one of these alternative loans, then later try to qualify for an A-labeled loan, only to discover certain conditions (such as prepayment penalties) that make it difficult or financially disadvantageous to refinance.
The Bottom Line
A B/C loan is credit from alternative lender for subprime or thin-file borrowers, usually carrying higher interest rates and fees due to added risk. Responsible for repayment can help improve credit for better terms later, while the Dodd-Frank Act strengthened consumer protections and targeted predatory lending practices.