Subprime Loan

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DEFINITION of 'Subprime Loan'

A type of loan that is offered at a rate above prime to individuals who do not qualify for prime rate loans. Quite often, subprime borrowers are often turned away from traditional lenders because of their low credit ratings or other factors that suggest that they have a reasonable chance of defaulting on the debt repayment.

INVESTOPEDIA EXPLAINS 'Subprime Loan'

Subprime loans tend to have a higher interest rate than the prime rate offered on traditional loans. The additional percentage points of interest often translate to tens of thousands of dollars worth of additional interest payments over the life of a longer term loan.

However, getting a subprime loan could still be a good idea if the loan is meant to pay off a higher interest debt (such as credit card debt) and the borrower has no other means for payment.

The specific amount of interest charged on a subprime loan is not set in stone. Different lenders may not value a borrower's risk in the same manner. This means that a subprime loan borrower has an opportunity to save some additional money by shopping around.

RELATED TERMS
  1. Credit Rating

    An assessment of the credit worthiness of a borrower in general ...
  2. Problem Loan

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  3. Front-End Debt-to-Income Ratio ...

    A variation of the debt-to-income ratio (DTI) that calculates ...
  4. Default

    1. The failure to promptly pay interest or principal when due. ...
  5. Collection Agency

    A company hired by lenders to recover funds that are past due ...
  6. Prime Rate

    The interest rate that commercial banks charge their most credit-worthy ...
RELATED FAQS
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    The credit score, commonly referred to as a FICO score, is a proprietary tool created by the Fair Isaac Corporation. This ... Read Full Answer >>
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