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Concept
Subprime lending
Summary
In finance, subprime lending (also referred to as near-prime, subpar, non-prime, and second-chance lending) is the provision of loans to people in the United States who may have difficulty maintaining the repayment schedule. Historically, subprime borrowers were defined as having FICO scores below 600, although this threshold has varied over time.
These loans are characterized by higher interest rates, poor quality collateral, and less favorable terms in order to compensate for higher credit risk. During the early to mid-2000s, many subprime loans were packaged into mortgage-backed securities (MBS) and ultimately defaulted, contributing to the financial crisis of 2007–2008.
The term subprime refers to the credit quality of particular borrowers, who have weakened credit histories and a greater risk of loan default than prime borrowers.
As people become economically active, records are created relating to their borrowing, earning, and lending histories. This is called a credit rating; although covered by privacy laws, the information is readily available to people with a need to know (in some countries, loan applications specifically allow the lender to access such records).
Subprime borrowers have credit ratings that might include:
limited or no debt experience;
limited or no possession of property assets that could be used as security (for the lender to sell in case of default);
excessive debt
the known income of the individual or family is unlikely to be enough to pay living expenses, plus interest and repayment;
a history of late or sometimes missed payments;
failures to pay debts completely (default debt);
legal judgments such as "orders to pay" or bankruptcy (sometimes known in Britain as County Court judgments or CCJs).
Lenders' standards for determining risk categories may also consider the size of the proposed loan, and also take into account the way the loan and the repayment plan is structured, if it is a conventional repayment loan, a mortgage loan, an endowment mortgage, an interest-only loan, a standard repayment loan, an amortized loan, a credit card limit or some other arrangement.
Official source
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