Where does a smart consumer shop for a subprime loan? The same places you go for a prime loan.

One of the biggest mistakes borrowers can make is to set out shopping for a "subprime" loan, says Norma Garcia, senior attorney for Consumers Union. Instead, you want to shop a variety of lenders and get the best rate you can, regardless of how that lender classifies you.

If you look specifically for subprime loans or lenders, you could be outsmarting yourself. "Lenders can offer you only the products they have available," says Garcia. But a lot of them have subprime affiliates, so they might be able to help you out.

The definition of "subprime" will vary by lender. By marketing yourself only to subprime lenders, you don't even have the option of a better deal. And the lender is under no obligation to tell you that you could get a lower rate.

"One of the things we find is that borrowers can be charged different rates depending on which door they walk into," says Allen Fishbein, director of housing and credit policy for the Consumer Federation of America.

Go through the wrong door, and you risk getting a more expensive loan, says John Taylor, president and CEO of the National Community Reinvestment Coalition. "If you walk into a subprime branch, they will not say, 'You've got an 800 (credit score), you've got to go uptown.'"

Ready, set, shop
Start with the bank or credit union where you already have an account relationship, says Jean Ann Fox, director of consumer protection for the Consumer Federation of America. Find out what they offer and see if you qualify. If you know your actual credit score, you can ask them for some unofficial advice on the terms they might be able to give you. This approach would allow you to start shopping without having creditors make inquiries on your credit report. (Inquiries lower your credit score. But if you're shopping for a home or auto loan, all inquiries within a 14-day period are supposed to be treated as one query, which helps you minimize the impact.)

Next, consider past relationships such as banks and credit unions that you have had good dealings with previously. Add to the mix financial institutions that you've researched that seem to have a good track record.

"You really want to shop the prime lenders," says Michael Stegman, professor of public policy and director of the Center for Community Capitalism at The University of North Carolina at Chapel Hill. Many lenders now have subprime divisions. If you go in for a prime loan and don't qualify, they may be able to refer you to another part of the same company. Also, some lenders have community-development requirements.

Consumer advocates warn that subprime borrowers are more likely to be offered disadvantageous terms. So it can literally pay to shop and compare. "If you're in a marginal area, you have to do that extra bit of due diligence," says Robert Manning, professor at Rochester Institute of Technology and author of "Credit Card Nation: The Consequences of America's Addiction to Credit."

Fishbein agrees, "It is only through getting a range of different offers that a borrower can get a sense of what the market is like, and what the variation in the market is like."

And don't act in desperation. "Don't call any phone number listed on a telephone pole," says Taylor.

Instead, stick with the names you know. While you still have to keep up your guard, you'll eliminate a lot of potential problems.

Subprime credit cards, often marketed to help consumers build up a positive credit history, are a particular problem, says Taylor.

"There are a lot of fly-by-night cards out there from fly-by-night companies," he says. "If you haven't heard of the bank, don't get the card. Even if you have heard of the bank, remember the card may have application fees, as well as onerous annual fees as well as security deposits."

If you use a mortgage broker, don't count on that as your only source of information. Even though brokers can offer loans from several lenders, they aren't required to give you the lowest rate they find and may collect commissions from the lenders, Fishbein says.

Also beware of any lenders who are soliciting you, says Taylor. "You should presume that if you're in the subprime marketplace that you have a target on your back."

The smartest move, he says, is to do your own shopping. Use some of the online sites to see what kind of rates you can get. "Educate yourself," he says. "Somebody wants your business."

At the same time, make sure you're not giving lenders permission to pull your credit records until you're ready.

Before you sign anything
How badly do you really need the money? If you're reading this, the answer is probably pretty badly. But step back from the problem for a minute.

If the money is to pay a creditor, is it practical to make a payment arrangement yourself or have a legitimate nonprofit credit counseling service work one out for you? By dealing with the original problem, you're not digging your hole a little deeper, says Fox.

You might also have other borrowing options. For a smaller amount, some employers will advance money against the next paycheck, which is a better option than a payday lender.

If you're looking for a few thousand to fix up your home and live in a certain area or fit a particular demographic, sometimes community housing groups can make loans or grants, says Garcia.

Other similar groups will help with counseling services or work with banks to secure loans for first-time buyers, says Ira Rheingold, executive director of the National Association of Consumer Advocates.

That counseling could also make you eligible for certain government-sponsored loans, says Garcia. "Sometimes people don't realize they have resources available to them," she says.

But you have to be careful, too. Sometimes con artists will try to impersonate these groups. How to tell the difference: Find the organization through a source you recognize, such as your bank, credit union, local municipality or national housing group, like the Center for Responsible Lending. And watch your wallet. If you're getting hit with fees and charges upfront while being promised loans or access to loans, that's not a good bet.

After you've shopped your options, don't be afraid to get some third-party advice. "If you've already identified a counseling service, that's a source," says Garcia. That way, someone can give you feedback on which loan might best suit your situation.

And do more than a little research on your lender. Put the name in an Internet search engine and see what pops up. Contact your state consumer's office and see if they've had complaints. Ditto the state where the institution is based. Check message boards to learn what customers are saying. And you can also contact consumer groups that specialize in housing issues and find out what they are hearing about the company.

Consumer advocates advise going with names and institutions you recognize. But even brand names can have problems, so you want to read every clause and understand every aspect of your loan agreement.

Every loan will come with a disclosure form that should spell out the loan amount, interest rate, fees and other charges.

Some lenders with rush you through the process.

"Lenders will tell people 'this is just something to get your money processed, so sign here,'" says Manning. "They tell people it's not important. They're supposed to go through it step by step."

If you're in the subprime category and are borrowing money, you want a lender who is reporting to the credit bureaus. Building that positive payment history is what will take you from subprime to prime. So "you need to make sure that the lender is going to file the satisfaction of the loan," says Manning.

You can do that several ways: Ask the lender, and then check the reporting policy on the lender's Web site. And if you have prior loans there, check your credit report.

"The best protection for the consumer is to become more knowledgeable about what they qualify for and what they don't," says Taylor. And the best way to avoid problems "is by being an informed consumer."

Dana Dratch is a freelance writer based in Atlanta.

This story ran on Bankrate.com on November 1, 2005.