Subprime Credit

AAA

DEFINITION of 'Subprime Credit'

General term for borrowings of subprime debt, or loans made to people with less-than-perfect credit or short credit histories. Subprime credit includes the original borrowing itself, as well as any derivative products such as securitizations that are based on subprime loans and then sold to investors in the secondary markets.

A big portion of the total market for subprime credit is based on subprime mortgages, or home loans to borrowers of questionable creditworthiness.


INVESTOPEDIA EXPLAINS 'Subprime Credit'

Subprime credit has highly debated pros and cons; on the plus side it allows people who wouldn't otherwise have access to credit to obtain loans for things like automobiles, homes and credit cards. On the negative side, subprime credit can come with very unfavorable terms based on high interest rates, excessive fees and short grace periods.

Securities that use subprime credit as collateral have become widespread in the marketplace, with billions of dollars in collateralized debt obligations (CDOs) owned by investors that are based on the cash flows from subprime credit.

RELATED TERMS
  1. Collateralized Debt Obligation ...

    An investment-grade security backed by a pool of bonds, loans ...
  2. Credit Cycle

    A cycle involving the access to credit by borrowers. Credit cycles ...
  3. Subprime Lender

    A type of lender that specializes in lending to borrowers with ...
  4. Recession

    A significant decline in activity across the economy, lasting ...
  5. FICO Score

    A type of credit score that makes up a substantial portion of ...
  6. Risk

    The chance that an investment's actual return will be different ...
Related Articles
  1. Investing Basics

    Subprime Lending: Helping Hand Or Underhanded?

    These loans can spell disaster for borrowers, but that doesn't mean they should be condemned.
  2. Personal Finance

    The Fuel That Fed The Subprime Meltdown

    Take a look at the factors that caused this market to flare up and burn out.
  3. Investing

    What is a subprime mortgage?

    A subprime mortgage is a type of loan granted to individuals with poor credit histories (often below 600), who, as a result of their deficient credit ratings, would not be able to qualify for ...
  4. Fundamental Analysis

    Are accounts receivable used when calculating a company's debt collateral?

    Learn how accounts receivables are recorded as assets on a balance sheet; they are used when calculating a company's total debt collateral.
  5. Professionals

    How do companies measure labor supply in human resources planning?

    Find out how and why a company's human resources department would measure labor supply, and what policies would address a shortage or surplus.
  6. Fundamental Analysis

    Why are OTC (over-the-counter) transactions controversial?

    Learn more about over-the-counter transactions, and why OTC traders are considered riskier than traders working with larger market exchanges.
  7. Options & Futures

    What is the difference between arbitrage and hedging?

    Dive into two very important financial concepts: arbitrage and hedging. See how each of these strategies can play a role for savvy investors.
  8. Fundamental Analysis

    What is the difference between cost of equity and cost of capital?

    Read about some of the differences between a company's cost of equity and its cost of capital, two measures of its required returns on raised capital.
  9. Fundamental Analysis

    What is arbitrage pricing theory?

    Find out what arbitrage pricing theory is and how it can theoretically be used by investors to generate risk-free profit opportunities.
  10. Fundamental Analysis

    What does a high weighted average cost of capital (WACC) signify?

    Find out what it means for a company to have a relatively high weighted average cost of capital, or WACC, and why this is important to lenders and investors.

You May Also Like

Hot Definitions
  1. Command Economy

    A system where the government, rather than the free market, determines what goods should be produced, how much should be ...
  2. Prospectus

    A formal legal document, which is required by and filed with the Securities and Exchange Commission, that provides details ...
  3. Treasury Bond - T-Bond

    A marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest ...
  4. Weight Of Ice, Snow Or Sleet Insurance

    Financial protection against damage caused to property by winter weather specifically, damage caused if a roof caves in because ...
  5. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
  6. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
Trading Center