Subprime Loans

Subprime Loans

Subprime loans are loans made to individuals and companies who have lower credit ratings. As noted in the name, "subprime" loans tend to have higher interest rates than prime rate loans. These loans can be in the form of mortgages, car loans and even credit cards.1

In recent years, we have been experiencing a growing number of defaults on these subprime loans. It has gotten so out of hand it has been referred to a subprime loan crisis. This should not come to a surprise to anyone given the fact that those who are given these loans are at greater risk of not repaying them. This type of practice has become a controversial issue from a moral standpoint. Non-traditional lenders involved in subprime lending know the risk of default at the onset of the transaction and understand that the probability of ultimately seizing collateral assets is high.

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Source:
The Subprime Market's Rough Road
Nick Timiraos
WSJ, February 17, 2007; Page A7
http://online.wsj.com/article/SB177167930652011972.html

Unfortunately, this crisis could trigger a recession and which many do not believe has been fully realized. Some of these defaulted loans were packaged together and sold to banks as "mortgage-backed securities". The borrowers have had to abandon their homes leaving them vacant and subject to vandalism thus reducing their value and leaving the holders of these less than desirable securities out in the cold.2