A subprime loan can be defined as a loan that is given to people who are a little low in terms of their credit ratings. Typically, these loans are offered at a rate that is higher than what the standard price for loans is. People who are unable to garner requisite finances for their needs will turn to this method. The reason for that rejection at the hands of the traditional lenders is that they may see their bad credit ratings as a risk that they aren’t prepared to take.
Credit ratings are created on the record of your credit related activities with the bank. The lower your credit rating, the greater the chance of you not being able to fulfill your loan commitments. When you have a number of late payments on record or you have defaulted from a loan all that can sum up to ruin your credit rating.
What Are Subprime Loans
A Little Detail
The interest rate as mentioned above is higher in the case of subprime loans in comparison to what the normal banks and lenders would charge you for the same amount of money loaned. The increase in percentage of interest in the end adds up to a considerable portion of the subprime lenders income since the amount off interests alone could translate into tens of thousands of dollars for a long term loan.
What is important to note here is that in a subprime loan the amount charged on the loan is not same for all lenders. Since a subprime loan is not regulated through banks etc, most lenders will charge an interest rate as they see fit. The primary factor under their consideration will be the risk of you defaulting on the loan. The greater the risk a person sees in you, the greater the interest rate that they will charge.
Delve into History
The question of how the subprime loans came about is an interesting one. As the rates of mortgage started to drop in the US one of the favorite acquisitions by people started to become home buying. In this team many people wanted to use loans from banks and other traditional lending sources to finance their acquisition of a home. However a significant number of these people were turned away. This meant that there was a large number of public in need of financing but short of any traditional financing option.
This is when some lenders realized the idea of lending money at a higher interest rate to these people in desperate need of finances even if they may have bad credit ratings. What they did was they tried to give them similar is not more welcoming packages at a premium price. As the demand for such loans increased there were a number of people willing to invest in the India despite the risks of the money being defaulted on.