subprime loan

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Related to subprime loan: CDO, Subprime mortgage

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.
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.
According to the EDC, the number of subprime loans in the city increased by an astounding 581% between 1999 and 2006.
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.
The increase in foreclosures and equity-stripping scams is actually rooted in the sharp rise of subprime loans to Blacks and Latinos.
In contrast, both measures of subprime loan performance showed substantial increases.
ConformX Upgrade Creates Compliant Loan Comparisons for Subprime Loans
Even high-income African Americans were just as likely to be sold a bad subprime loan as a low-income white person," says Austin King, director of the ACORN Financial Justice Center.
Financial issues came under heavy pressure amid speculation that losses at major financial institutions will expand further due to the subprime loan problem.
Mortgage delinquencies on subprime loans in New Hampshire increased by 156 basis points to 14.
The decline in quality is revealed by adjusting subprime loan performance for differences in borrower characteristics, loan characteristics, and economic circumstances.