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 top financial regulator in the nation said that it would cut the interest rate ceiling for subprime loans in a move expected to make loan repayments easier for low-credit borrowers.
But in 2003, subprime loans began to take off, and FHA lending began to decline.
Auto Business News-August 5, 2014--General Motors investigated over subprime loans
Wealthier minorities are more likely to receive subprime loans than affluent whites, according to a New York University study of the Home Mortgage Disclosure Act.
The starts rate declined by 30 basis points for subprime loans compared with the fourth quarter of 2008.
Subprime mortgages have been getting a lot of attention in the United States since 2000, when the number of subprime loans being originated and refinanced shot up rapidly.
As demand for subprime loans grew, financial institutions sought to remove risky assets from their balance sheets.
According to the EDC, the number of subprime loans in the city increased by an astounding 581% between 1999 and 2006.
12 billion in appraisal losses on subprime loans and $5.
SALEM - The Oregon House Thursday passed a watered-down proposal meant to help consumers avoid predatory subprime loans and get out from under them without facing prepayment penalties.
An estimated 4300 New Hampshire homeowners with subprime loans will lose their homes to foreclosure between now and the end of 2009, according to data compiled by a congressional committee.
The high rates of subprime lending to African American and Latino women--even those earning double the prevailing local income--may make it harder to sustain homeownership in these communities because of the high monthly payments on subprime loans.