Subprime Rates

Many people have heard the terms “subprime rates,” “subprime mortgages,” or “subprime loans,” especially recently, when the economic downturn brought the financial markets and their aspects into the limelight. Simply put, subprime interest rates on any kind of loan mean that the lender views the transaction as a high-risk, high-yield contract with a customer who does not have the best creditworthiness and may not be fully trusted to pay the loans back on time.

Subprime interest rates can apply to any kind of loan, but have gained a special prominence and public attention in the housing market in the United States, as before the recent recession banks and mortgage lenders were pressured by the government and others into extending more subprime mortgages than they might have thought reasonable otherwise. The often extremely high interest rate on a subprime loan is basically the extra money that the consumer has to pay the bank for the risk that the bank is willing to take. Many have criticized the phenomenon of subprime lending as a predatory lending practice, preying on consumers who may already be in debt and have bad credit histories which will only get worse if they take these offers. Supporters argue, however, that the subprime lending market is crucial for those who would otherwise have no access to credit and thus lose out on a lot of financial opportunity.

Besides subprime mortgages, there are also many subprime credit cards out there, which work based on the same principle: the institution grants their customer a credit line, but at a high cost and with great risk. Subprime loans of any kind can be quite dangerous to people who choose to get them, but these can also be used carefully with positive results.