subprime loan

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Subprime Loan

A loan that is made at a higher interest rate than most other loans. Subprime loans are made to borrowers who do not qualify for ordinary loans because of bad credit history or some other reason. There is a higher risk of default on subprime loans. Their prevalence was a significant factor in the 2008 credit crunch. See also: Subprime Mortgage.

Subprime loan.

Lenders may make subprime loans to borrowers who would not ordinarily qualify for credit if customary underwriting standards were applied. To offset the increased risk that these borrowers might default, lenders charge higher interest rates than they offer to creditworthy borrowers and assess additional fees.

While subprime rates vary from lender to lender, the Federal Reserve defines a subprime loan as one that carries an interest rate at least three percentage points higher than the rate on a US Treasury bond that has the same term as the loan.

Subprime loans may provide credit to responsible people who may not have a strong credit history. However, subprime lending practices can be abusive or predatory, trapping unsophisticated borrowers in a cycle of debt while providing initially large profits for the lender.

Lenders with large portfolios of these loans are vulnerable to major losses in market downturns.

Subprime loans can be securitized and sold to investors as pass-through securities or in more complex packages such as collateralized debt obligations (CDOs). Individual and institutional buyers purchase these products for the promise of higher than average returns despite the greater risk of default.

subprime loan

A loan at higher interest rates because the borrower does not qualify,for credit or income reasons,for the best rates.

References in periodicals archive ?
The market for mortgage-backed loans shut down during the crisis, after the "toxic" sub-prime loan disaster in America left them with a terrible reputation.
The market for mortgagebacked loans shut down during the crisis, after the "toxic" sub-prime loan disaster in America left them with a terrible reputation.
The CAP loans, which were CRA-eligible, had low down payments and flexibility with respect to credit and debt-to-income ratios, all usually regarded as high risk factors that could result in a borrower being consigned to a sub-prime loan.
BRITAIN'S biggest sub-prime loan broker is run by a man banned from being a company director for serious misconduct.
As world financial markets shudder under the impact of the US-centred sub-prime loan disaster, some economists are worried that Australia is heading for a housing-led recession similar to that of the early 1990s.
The default scare caused by the sub-prime loan meltdown caused these "investors" to cease purchasing any of the Alt-A loans.
Lewis herself had a sub-prime loan, meaning her interest rates were much higher than that of a prime home loan.
Also, traditional lenders often do not consider the thinner credit histories low- to moderate-income Latinos are likely to have, relegating them to sub-prime loan rates.
If you are currently stuck with a sub-prime loan (high-interest loans given to people with poorer credit ratings), you might consider a longer-term fixed-rate mortgage if you qualify.
But as sub-prime loan rates increased (about 14 percent at this writing), many home buyers bought land to put their homes on and applied for land/home mortgages.
It is planning to sell four sub-prime loan portfolios next year, worth a total of USD2.
But the finance chiefs from the Group of Seven industrialised nations promised no new concrete measures to shore up their economies and markets in light of the recent sub-prime loan crisis.