Definition Of Subprime Lending
Subprime lending is lending money or giving loans to people who are categorized as high risk borrowers. Usually subprime lending takes into consideration the loan amount, the borrower's credit scores, the borrower's income and debt, and the value of the collateral against the loan amount. |
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Usually subprime lending is done to borrowers who do meet the standards and guidelines for prime loans as prescribed by Fannie Mae and Freddie Mac. Also, it has been seen that borrowers usually have a FICO credit score of less than 640 points.
Subprime lending covers loans like mortgages, auto loans as well as credit card loans. Since the borrowers belong to high risk category on account of their poor credit history, the interest rate charge is much higher than what prime lenders would charge. When it comes to mortgages, subprime lenders charge a higher interest rate; while credit card loans are charged extremely high interest rates along with late fees.
Although the interest rates are high, subprime lending opens avenues for people who otherwise would not have qualified for loans from traditional lenders. Many times, people with poor credit history resort to subprime loans as way of repairing their credit by ensuring that all payments are made on time and in full. This way the subprime lenders report the repayment habit of the borrowers to the credit bureaus and thereby improving the borrowers' creditworthiness. Once the credit score improve, these borrowers then refinance their high interest loans at lower interest rates.
Subprime lending had a huge impact on many companies, even those which were not associated with the loan industry. Many experts blame the practice of subprime lending for the collapse of the housing market in the United States along with many other factors and causes which, in turn, lead to an economic recession in the country and the rest of the world.
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