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Subprime Lending

Subprime loans are a type of loan that are offered to consumers at an interest rate above prime to individuals who do not qualify for prime rate loans. These loans carry a higher rate of interest than prime loans to compensate for the increased credit risk. They are typically for persons with blemished or limited credit histories.

Whether applying for a home mortgage, auto loan or credit card, subprime borrowers are typically turned away from traditional lenders because of their low credit ratings or other factors that suggest that they have a reasonable chance of defaulting on the debt repayment.

Because the interest rate can be substantially higher than prime rate, the additional interest charged often translate to tens of thousands of dollars worth of additional interest payments over the term of the loan. However, this being said, getting a subprime loan could still be a good idea if the borrower has no other means for payment or if the loan is obtained to consolidate, or pay off, higher interest debt, for example, credit card debt.

While the interest rate is set higher than prime rate, the actual rate can vary dramatically from lender to lender. Different lenders may not value the borrower's risk in the same manner. Therefore, it is important that prospective borrowers shop around to ensure that they get the best loan that is most appropriate to their needs.

Some facts about subprime lenders

  • Subprime lending is offered in most all types of lending,
    This includes mortgages, credit cards and auto loans.

  • Home refinance loans account for higher shares of subprime lenders' total origination than prime lenders' originations.

  • Subprime lenders originate a larger percentage of their total originations in predominately black census tracts than prime lenders.

  • Subprime lenders are likely to have terms like "consumer," "finance," and "acceptance" in their lender names.

Subprime Lending and Minorities

Many question why minorities appear to be over-represented in the subprime lending market. Studies reveal that even in upper-income African-American neighborhoods one is 1.5 times as likely to have a subprime loan than persons in low-income white neighborhoods. In neighborhoods where Hispanics comprise at least 80 percent of the population, they were 1.5 times as likely than the nation as a whole to have a subprime mortgage loan.

Some allege this disparity to be attributed to subprime lenders purposefully marketing to African-American communities—what some have called reverse redlining. They allege lenders will provide loans to these communities, but at a higher cost and with less favorable conditions.

Proponents of subprime lending maintain that the practice extends credit to people who would otherwise not have access to the credit market.

 


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