What is a 'B/C Loan'

A B/C loan is a loan to a subprime or thin file borrower. This type of loan is typically issued by alternative lenders charging high interest rates and fees.

BREAKING DOWN 'B/C Loan'

B/C loans are issued to low credit quality borrowers and borrowers with minimal credit history. Generally A-labeled loans follow more conventional standards and are issued by traditional financial institutions. A-labeled loans are encompassing a greater majority of the credit market as new regulations from the Dodd-Frank Act tighten standards for loan underwriting and provide greater incentives for higher quality loans.

A-Labeled Loans

The Dodd-Frank Act instituted new lending requirements for all lenders which increased the standards for lending across the industry. 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.

B/C-Labeled Lending

B/C-labeled loans are alternative loans issued to subprime and thin file borrowers. They offer a second tier of loan eligibility for borrowers that do not qualify for A-labeled loans. They can often be a good way for borrowers to obtain funding while also improving their credit score which can help them to receive more favorable financing terms in the future.

These 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 which puts them in the fair, poor or very poor category according to VantageScore credit scoring methodologies. According to data from Experian these categories encompass 69.10% of borrowers.

Borrowers in the B/C-labeled loan category may also be thin file borrowers with no credit history for which to generate a credit score. 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 A-labeled prime loans. These types of loans however are generally more favorable than D-labeled loans which can encompass payday loans from payday lenders with annual interest rates ranging 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. This puts annual interest rate levels generally in the 25% to 75% range.

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