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Simple English definitions for legal terms
subprime loan
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A quick definition of subprime loan:
A subprime loan is a type of loan given to people who are considered riskier borrowers because they have poor credit histories or low income. Because of this increased risk, lenders charge higher interest rates to compensate. This means that subprime borrowers end up paying more for their loans than people with better credit scores or more collateral.
A more thorough explanation:
A subprime loan is a type of loan that is offered to borrowers who have a poor or limited credit history. These borrowers are considered to be riskier than prime borrowers, who have a good credit history and are more likely to repay their loans on time. As a result, subprime loans come with higher interest rates and fees to compensate for the increased risk.
- A borrower with a low credit score applies for a car loan and is offered a subprime loan with an interest rate of 15%, while a borrower with a high credit score is offered a prime loan with an interest rate of 5%.
- A borrower with a history of missed payments applies for a mortgage and is offered a subprime loan with a higher interest rate and fees than a borrower with a history of on-time payments.
These examples illustrate how subprime loans are offered to borrowers who are considered to be higher risk due to their credit history or financial situation. The higher interest rates and fees charged by lenders help to offset the risk of default and potential losses.