What Is Subprime Lending?

Wikipedia’s entry says that subprime lending is also known as second chance lending, near-prime and B-paper. It means lending at a higher interest rate than the prime rate.

Only prime borrowers — those with the best credit scores — get the prime rate.

In America, subprime mortage lending means lending that does not meet Fannie Mae or Freddie Mac guidelines.

In 2006, the Wall Street Journal wrote that 61% of all borrowers receiving subprime loans had credit scores high enough to qualify for prime conventional loans.[1]

Subprime also refers to banknotes taken on real estate that won’t sell on the primary market. These are often investment property loans.

The self-employed often take subprime loans.

Subprime loans are risky for both lenders and borrowers. Why? Because of the combination of high interest rates, less than stellar credit and the higher likelihood of bad financial developments for the subprime borrower.

Because of this added risk, subprime loans charge higher interest rates than A-paper loans due to the perceived increased risk.

Aside from mortgages, other subprime loans can be taken out for cars and credit cards and short-term "payday" loans.

Subprime lending has a lot of critics. They allege it is predatory. That it aims at borrowers who are too stupid to understand what they are signing.

Subprime loans often demand higher fees and often lead to defaults, seizures, strokes and foreclosure.

There have been charges of mortgage discrimination on the basis of race.[2] Proponents of subprime lending maintain that the practice extends credit to people who would otherwise not have access to the credit market.[3]

Credit around the world has been reduced because of 2007’s subprime meltdown in America. Millions of borrowers must pay higher rates because of it. Hundreds of thousands of borrowers have been forced to default or file for bankruptcy. Hundreds of subprime lenders or brokers have closed, some have filed for bankruptcy and several have been acquired.

About Luke Ford

Raised a Seventh-Day Adventist at Avondale College in Australia, Luke Ford moved to California in 1977. He graduated from Placer High School in 1984, reported the news at KAHI/KHYL radio for three years, attended Sierra College and UCLA, was largely bedridden by Chronic Fatigue Syndrome for six years, and converted to Judaism in 1993. From 1997-2007, Luke made his living from blogging. Living by Beverly Hills (Alexander90210.com), he now teaches the Alexander Technique (moving the way the body likes to move). Lessons cost $100 each and last about 45 minutes. In 2011, Luke completed a three-year teaching course at the Alexander Training Institute of Los Angeles. His personal Alexander Technique website is Alexander90210.com. Luke is the author of five books, including: » The Producers: Profiles in Frustration » Yesterday’s News Tomorrow: Inside American Jewish Journalism
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