What is Subprime Lending?
Subprime lending refers to the practice of making loans to people who do not qualify for the best interest rates (usually called conforming loans or Alt-A loans) because of their credit history. Subprime lending is risky for both lenders and borrowers because of the combination of high interest rates, poor credit history, and poor financial decision making often associated with borrower.
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Subprime lending is available in all types of situations including subprime mortgages, subprime car loans, and subprime credit cards, among others. One reason for confusion in the term is that "subprime" refers to the credit status of the borrower (being less than ideal), not the interest rate on the loan itself.
Subprime lending is controversial. Some argue that the subprime lending companies engage in predatory lending practices like deliberately extending credit to people who could never meet the terms of their loans. This practice almost ensures default, seizure of collateral, and foreclosure. Others say that the benefits subprime lending is that institutions can extends credit to people who would otherwise not have access to the credit market.
Controversy around subprime lending has taken on larger meaning as the result of an ongoing lending and credit crisis both in the subprime industry and in the greater financial markets which began in the United States. As people are now not able to meet the obligations of their cuurent loans, thousands of borrowers have been forced to default and several major subprime lenders have filed for bankruptcy.
