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History Of Subprime Loans
A loan which is made to an individual having a high credit score (basically a good borrower, who pays back his loans on time without defaulting) is called a prime loan. |
Lending companies usually restrict themselves to such prime loans, but since the early 1990s, loans called subprime loans have also played an important part of the lending market.A subprime loan is a high risk loan, one that is given to individuals with a poor credit score who may default on their payments, but at a high rate of interest so that the loans that do get repaid earn the lenders a very healthy profit. The two main reasons for the beginning of this subprime loan trend are the low prime interest rates of the 1990s and the relaxation of usury laws. Usury is when lenders charge interest rates far higher than acceptable ones, which is still punishable by law, although rules are now less stringent.
In 1993, lenders noticed a big untapped supply of people with poor credit scores who could not access credit facilities who were considered high risk borrowers, those who had good incomes, but not the best of credit histories. In 1993, with low prime interest rates and negative real interest, institutions started offering subprime loans at reasonable interest rates. Slowly, almost everyone with a poor credit history turned to subprime loans to purchase a house or a car or anything else, and the percentage of loans that were of the subprime variety kept increasing. This percentage increased still further with the relaxation of usury loans as more and more lenders started charging high interest rates for subprime loans. This is how subprime loans were first handed out.
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How Do Subprime Loans Work ?
 Before one can understand how a subprime loan works, it is essential to know what a prime loan is. Lending in the United States as well as in most countries mainly depends on the borrower’s credit score. A credit score is basically a representation of an individual’s history regarding payment of previous loans, payment of credit card bills, debts, monthly income, capacity to pay back loans etc. Therefore, someone with a high credit score is a good borrower, or a prime borrower, someone who is very likely to pay his loan back to the lender without defaulting. This kind of loan is a good or a prime loan. More..
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