What Is Subprime?

What Is Subprime?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

Subprime refers to a type of loan or credit that is offered to individuals with poor credit scores who are considered a high risk by lenders. These borrowers may have had issues with paying back loans in the past, have a brief credit history, or no credit history at all. Subprime loans tend to have higher interest rates to accommodate the increased risk taken by the lender. While it’s an option for borrowers with less-than-stellar credit, the high-interest rates associated with these loans can make them difficult to pay off.

Related Questions

1. What is a Subprime Mortgage?

A subprime mortgage is a type of mortgage that’s offered to homebuyers with poor credit. If a homebuyer cannot qualify for a conventional mortgage due to low credit scores, a subprime mortgage can be an alternative. This type of mortgage carries a higher risk for the lender, and therefore, often comes with a higher interest rate.

2. What Does it Mean to Be a Subprime Borrower?

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A subprime borrower is a person who is considered a higher-than-normal credit risk due to a weaker credit history. Typically, this includes people who have low credit scores or have other factors that make them a risk to potential lenders. These borrowers generally get higher interest rates on loans, implying more cost over the life of the loan.

3. Are Subprime Loans Bad?

The reputation related to subprime loans is often negative, mainly due to their higher interest rates which can create a financial burden for the borrower. However, they are not inherently bad. For some people with poor or little credit history, these loans provide an opportunity to obtain credit or purchase a home which they might not have otherwise been able to.

4. What led to the Subprime Mortgage Crisis?

The subprime mortgage crisis was a nationwide banking emergency that occurred in the United States due to an increase in home foreclosures and the decline in securities backed by said mortgages. It was sparked primarily by a rapid rise in subprime lending and the increasing rates of default that resulted when large numbers of homeowners were unable to meet their mortgage obligations.

5. How can a Person Improve their Credit to Avoid Subprime Rates?

Improving one’s credit requires a combination of consistent on-time payment of all bills, reducing outstanding debt, regularly reviewing credit reports for inaccuracies, and not applying for new credit unless necessary. Over time, these actions can help increase a credit score and eventually move a borrower out of the subprime category.