subprime loan


Also found in: Dictionary.
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 surge in housing values in the United States in the early 2000s--and the resulting bust that started in late 2006--exposed two distinct problems with subprime loans. Firstly, with the securitization of mortgages, these higher-risk loans/mortgages were bundled together and given higher-than-appropriate Triple A credit ratings.
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.
likelihood of receiving a subprime loan or of facing foreclosure.
In this narrative, unregulated mortgage brokers produced some undefined number of subprime loans through predatory lending to unwitting homebuyers.
Unlike subprime loans, prime loans are made to borrowers with good credit, who fully document their income and make traditional down payments.
While homeowners of all mortgage types have faced foreclosure in the mortgage crisis, subprime loan holders are dramatically more likely to be affected.
The New Hampshire Housing Finance Authority predicted in a December 2007 study that the state would average 300 new subprime loan foreclosures a month through this fall.
BANKS AND MORTGAGE LENDERS IN Arkansas have gone back to basics in the aftermath of the subprime loan crisis, requiring potential homebuyers to provide down payments and more documentation and have higher credit scores.
The subprime mortgage lending crisis has been particularly devastating for people of color, who are three times more likely than whites to have a subprime loan. But just how much are we actually losing?
The bill requires the disclosure of an often-hidden cost in subprime loans called a "yield spread premium." And it limits prepayment penalties so that people can, in a 60-day window before their loans reset at a higher interest rate, refinance a subprime loan and get into a more affordable loan.
A subprime loan is a loan made to someone who does not qualify for a more favorable rate because of low credit scores.