The term Subprime Lending was popularized in 2007 by various media groups when the credit crunch hit the world economy. It was introduced for the benefit of low income group and for borrowers with bad credit history. Since they do not qualify for a conventional loan, this worked as a useful alternative to get credit in affordable terms.
The subprime lending was first initiated in 1993 in USA. However it started accelerating around 2000 when the market had enough funds to provide credits to the conventionally unqualified or high risk borrowers. Since sub prime lending has regulated norms it helped high risk borrowers to avoid loan sharks and get loan under favourable terms.
Subprime lending does not follow any specified terms or conditions. It mainly depends on the borrower’s requirement, income, credit rating, debt ratio, loan amount and collateral. It is mostly used for taking up mortgages or refinances.
Borrowers with excessive debt, high default rates, bankruptcies or IVA opt for subprime loan and thus it is risky for both the creditor and the borrower. Sub prime lending also involve doorstep lending where a small amount is lent out to a borrower from a low income group.
Subprime lending includes bad credit loans, sub prime credit cards and sub prime car loans. These easy financial tools specifically enable the low income group to meet their requirements. On the other hand these financial services are given out on a rate higher than the usual. It is affordable for people who are taking up mortgages or short term loans.
The overall market of the sub prime lending has grown considerably and now it is worth much more than £30bn in UK alone. The growth was remarkably faster than the usual loan market. However, after the recession there has been a slump in the market and the rate of interest charged by the lenders has become exorbitant. The lenders are not doing very well too. Some of the top lenders have shut down (Ameriquest, MLN etc.) or filed for bankruptcy (New Century) and some of them are up for sale (Option One). However, many of the subprime lenders like Wells Fargo, HSBC Finance, Countrywide, CitiFinancial etc. are still functional.
However, before you go for a loan, ask yourself – do you really need a loan?
