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Subprime Loan Standards
Subprime loans are those loans given to a specific segment of borrowers with a not-so-good credit history. Their credit history may have been blemished by defaulting of payments or due to a bankruptcy or low incomes. |
Hence, most subprime lenders have tightened the standards on basis of which the loans will be disbursed to potential borrowers.The subprime lenders follow certain standards to ascertain the risk the potential loan borrowers’ may pose, before lending them a loan. They determine the suitability of a borrower to receive and repay a loan by checking the following factors:
- The amount of loan: This factor is taken into consideration to determine the overall ability of the borrower to repay the loan. The higher the loan amount the riskier it is for the lender. If the type of loan is non-traditional as is the case with the subprime lending, there are enhanced risks for the lender. To counter these risks the lender usually increases the interest rate, and charges higher fees. The interest rate and fees may vary with the lenders and the type of borrower as well.
- The credit rating of the borrower: this is determined by the FICO score that gives the lender an idea of the default by a customer. If the score is below 640, the customer is classified into the risk category and the loan structure is appropriately designed to enable the customer to make payments.
The other standards to determine the eligibility of a borrower are as follows:
- Ratio of debt of a potential borrower to his/her assets or income or earnings
- Ratio of loan disbursed to its value
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What Are Subprime Loans ?
 Consider these examples. Alex, an employee, has a very bad credit history. Samar, an emigrant, is new to the country and wants to buy a car immediately. Sarah earns less salary but she wants to own a car. Roger, owner of a company that went bankrupt last year, wants to buy a new home. Alex, Samar, Sarah and Roger will need loans. More..
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