A Subprime Loan is a type of loan offered to borrowers with low credit scores or poor credit history, usually at higher interest rates due to higher risk.
Subprime Loans are designed for individuals who do not qualify for standard (prime) loans because of low credit scores, irregular income, or past defaults. Since these borrowers are considered high-risk, lenders charge higher interest rates and stricter terms to compensate for the increased risk of default.
These loans can include personal loans, auto loans, and especially subprime mortgages. While subprime loans provide access to credit for underserved borrowers, they can lead to financial stress if repayment becomes difficult.
Subprime lending gained global attention during the 2008 Financial Crisis, where widespread defaults on subprime mortgages led to major financial instability.
Borrowers should carefully evaluate repayment capacity before taking subprime loans, as high interest costs can significantly increase total debt.
"A person with a low credit score is denied a regular loan but gets approved for a loan at 18% interest instead of the usual 10%. This higher-cost loan is a subprime loan."