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.

Understanding Subprime Credit

Subprime credit is, often, the only type of loan available to borrowers with low credit rati🧸ngs, high debt levels, a record of delinquency, defaults or bankruptcy, and without property or assets that can be used as 澳洲幸运5官方开奖结果体彩网:collateral. Lenders use a credit scoring system, like 澳洲幸运5官方开奖结果体彩网:FICO scores, to classify subprime borrowers based on the probability of repayment. Different creditors use different rules for what constitutes a 澳洲幸运5官方开奖结果体彩网: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 澳洲幸运5官方开奖结果体彩网:asset-backed securities, like 澳洲幸运5官方开奖结果体彩网:collateralized debt obligations (CDO) and 澳洲幸运5官方开奖结果体彩网:mortgage-backed securities (MBS).

Special Considerations

During the housing boom in the early 2000s, lending standards on 澳洲幸运5官方开奖结果体彩网:subprime mortgages were relaxed, with 澳洲幸运5官方开奖结果体彩网: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 澳洲幸运5官方开奖结果体彩网:subprime meltdown and the subprime crisis, which triggered the 澳洲幸运5官方开奖结果体彩网: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 澳洲幸运5官方开奖结果体彩网:subprime auto loans which has help🌼ed the economy to recover. However, auto loan delinquencies hit crisis levels in 2017, even as subprime auto-lending continued to boom, leading to specula𒉰tion that another credit bubble in the making which will ultimately burst.