Subprime Credit

Subprime Credit

Subprime credit refers to loans, usually offered at rates well above the prime rate, made to borrowers with poor credit ratings. During the housing boom in the early 2000s, lending standards on subprime mortgages were relaxed, with NINJA loans being made to borrowers with no income, no job or assets. When the bubble burst in 2007, the quantity of subprime credit in the financial markets contributed to the subprime meltdown and the subprime crisis, which triggered the Great Recession. Subprime credit is financed by repackaging subprime credit card debt, auto loans, business loans and mortgage into pools and selling them investors as asset-backed securities, like collateralized debt obligations (CDO) and mortgage-backed securities (MBS). Subprime credit is, often, the only type of loan available to borrowers with low credit ratings, high debt levels, a record of delinquency, defaults or bankruptcy, and without property or assets that can be used as collateral. Subprime credit is, often, the only type of loan available to borrowers with low credit ratings, high debt levels, a record of delinquency, defaults or bankruptcy, and without property or assets that can be used as collateral.

Subprime credit refers to loans, usually offered at rates well above the prime rate, made to borrowers with poor credit ratings.

What Is Subprime Credit?

Subprime credit refers to loans, usually offered at rates well above the prime rate, made to borrowers with poor credit ratings.

Subprime credit refers to loans, usually offered at rates well above the prime rate, made to borrowers with poor credit ratings.
Subprime credit is, often, the only type of loan available to borrowers with low credit ratings, high debt levels, a record of delinquency, defaults or bankruptcy, and without property or assets that can be used as collateral.
Consumer advocates say subprime credit is a social good and provides finance to low-income households even though it increases the risk of credit booms and busts.

Understanding Subprime Credit

Subprime credit is, often, the only type of loan available to borrowers with low credit ratings, high debt levels, a record of delinquency, defaults or bankruptcy, and without property or assets that can be used as collateral. Lenders use a credit scoring system, like FICO scores, to classify subprime borrowers based on the probability of repayment. Different creditors use different rules for what constitutes a subprime loan, but FICO scores below 619 have typically been classified as subprime in the past.

Subprime credit is financed by repackaging subprime credit card debt, auto loans, business loans and mortgage into pools and selling them investors as asset-backed securities, like collateralized debt obligations (CDO) and mortgage-backed securities (MBS).

During the housing boom in the early 2000s, lending standards on subprime mortgages were relaxed, with NINJA loans being made to borrowers with no income, no job or assets. When the bubble burst in 2007, the quantity of subprime credit in the financial markets contributed to the subprime meltdown and the subprime crisis, which triggered the Great Recession.

Consumer advocates say subprime credit is a social good and provides finance to low-income households. Yet it increases the risk of credit booms and busts. In the U.S., banks tightened lending standards after the financial crisis.

However, auto finance companies have used low interest rates to fuel a boom in subprime auto loans which has helped the economy to recover. However, auto loan delinquencies hit crisis levels in 2017, even as subprime auto-lending continued to boom, leading to speculation that this another credit bubble in the making which will ultimately burst.

Related terms:

Asset-Backed Security (ABS)

An asset-backed security (ABS) is a debt security collateralized by a pool of assets. read more

Collateralized Debt Obligation (CDO)

A collateralized debt obligation (CDO) is a complex financial product backed by a pool of loans and other assets and sold to institutional investors. read more

Collateral , Types, & Examples

Collateral is an asset that a lender accepts as security for extending a loan. If the borrower defaults, then the lender may seize the collateral. read more

FICO Score

A FICO score is a type of credit score that makes up a substantial portion of the credit report lenders use to assess an applicant’s credit risk. read more

The Great Recession

The Great Recession was a sharp decline in economic activity during the late 2000s and was the largest economic downturn since the Great Depression. read more

Mortgage-Backed Security (MBS)

A mortgage-backed security (MBS) is an investment similar to a bond that consists of a bundle of home loans bought from the banks that issued them. read more

NINJA Loan

A NINJA loan is a slang term for a loan extended to a borrower with "no income, no job and no assets." NINJA loans have largely ceased to exist in the United States due to tighter lending standards put in place after the 2008 financial crisis. read more

Prime Rate

The pime rate is the interest rate that commercial banks charge their most creditworthy customers. read more

Subprime Meltdown

The subprime meltdown includes the economic and market fallout following the housing boom and bust from 2007 to 2009. read more

Subprime

Subprime is a classification of borrowers with tarnished or limited credit history. Subprime loans carry higher credit risk, so higher interest rates. read more