Subprime Borrower

AAA

DEFINITION of 'Subprime Borrower'

A person who is considered a higher-than-normal credit risk. Subprime borrowers typically have a below-average credit history and are penalized for their poor credit with higher interest rates. Subprime borrowers may qualify only for higher-interest mortgages and higher APR credit cards. Subprime borrowers may have an extensive history of late or missed payments, default debt, excessive debt or no property assets that could be used as security. In the United States, subprime borrowers are often identified by having a FICO credit score below 640.

INVESTOPEDIA EXPLAINS 'Subprime Borrower'

Although subprime lending extends credit to people who may not otherwise qualify, the practice contributed to the subprime mortgage crisis in the U.S. in 2008. Roughly 80% of subprime borrowers were given adjustable-rate mortgages, and when the mortgages went to their higher interest rates, refinancing was difficult due to declining home values. This resulted in widespread mortgage default, foreclosures and the declining values of mortgage-backed securities.

RELATED TERMS
  1. Foreclosure - FCL

    A situation in which a homeowner is unable to make principal ...
  2. Subprime Meltdown

    The sharp increase in high-risk mortgages that went into default ...
  3. Delinquent Mortgage

    A mortgage for which the borrower has failed to make payments ...
  4. Underwater Mortgage

    A home purchase loan with a higher balance than the free-market ...
  5. Distressed Borrower

    A borrower who is unable to fully repay his or her debt due to ...
  6. FICO Score

    A type of credit score that makes up a substantial portion of ...
RELATED FAQS
  1. How have low interest rates affected lease rates in the automotive sector?

    Low interest rates have contributed substantially to increased lease rates in the automotive sector. In recent years, the ... Read Full Answer >>
  2. Does shopping for the best interest rate affect my credit score?

    Shopping for interest rates does not necessarily affect a person's credit score. When a borrower submits an application to ... Read Full Answer >>
  3. What role did securitization play in the U.S. subprime mortgage crisis?

    The securitization of subprime mortgages into mortgage-backed securities (MBS) and collateralized debt obligations (CDOs) ... Read Full Answer >>
  4. Do all banks use the Five Cs of Credit when evaluating potential borrowers?

    Both individual and business borrowers are asked to provide information related to their credit history, income and debt ... Read Full Answer >>
  5. How often is interest compounded?

    Interest can be compounded on any given frequency schedule. Common interest compounding time frames are daily, monthly, semi-annually ... Read Full Answer >>
  6. How does the loan-to-value ratio affect my mortgage payments?

    Several factors affect the mortgage rate you can obtain when you purchase a home. Lenders analyze credit histories and scores ... Read Full Answer >>
Related Articles
  1. Credit & Loans

    New Credit Scoring Forgives Small Debt

    FICO 08 means that certain types of old debt won't affect your credit score, but it's not all good news.
  2. Retirement

    Conduct A Financial Intervention

    Find out what you can do to help someone who is finanically out of control.
  3. Credit & Loans

    5 Keys To Unlocking A Better Credit Score

    Follow these tips and techniques to rebuild a ruined credit rating.
  4. Credit & Loans

    A Guide To Debt Settlement

    Find out how you can negotiate your way to a lower debt load by paying up front.
  5. Budgeting

    Debt Consolidation Made Easy

    These five steps can help get you out of debt faster and easier than you'd ever imagined.
  6. Credit & Loans

    Take Control Of Your Credit Cards

    The plastic in your wallet doesn't have to hurt your finances. Learn how to manage it responsibly.
  7. Credit & Loans

    The Importance Of Your Credit Rating

    A great starting point for learning what a credit score is, how it is calculated and why it is so important.
  8. Professionals

    Why Bad Credit Is Bad For Financial Careers

    In order to obtain and maintain a career in the financial industry, it is also important to have a clean credit report.
  9. Credit & Loans

    How Credit Cards Affect Your Credit Rating

    The average American household has four cards, but does that mean more is better?
  10. Options & Futures

    How To Establish A Credit History

    Can't get a credit card without a credit history, and can't get a history without a card? Break the Catch-22.

You May Also Like

Hot Definitions
  1. Fixed-Income Arbitrage

    An investment strategy that attempts to profit from arbitrage opportunities in interest rate securities. When using a fixed-income ...
  2. Venture-Capital-Backed IPO

    The selling to the public of shares in a company that has previously been funded primarily by private investors. The alternative ...
  3. Merger Arbitrage

    A hedge fund strategy in which the stocks of two merging companies are simultaneously bought and sold to create a riskless ...
  4. Market Failure

    An economic term that encompasses a situation where, in any given market, the quantity of a product demanded by consumers ...
  5. Unsystematic Risk

    Company or industry specific risk that is inherent in each investment. The amount of unsystematic risk can be reduced through ...
  6. Security Market Line - SML

    A line that graphs the systematic, or market, risk versus return of the whole market at a certain time and shows all risky ...
Trading Center