Subprime Loan

What is a 'Subprime Loan'

A subprime loan is 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.

BREAKING DOWN '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. Subprime Lender

    A type of lender that specializes in lending to borrowers with ...
  2. Subprime Market

    The market for lenders and borrowers of subprime credit, a credit ...
  3. Subprime Credit

    General term for borrowings of subprime debt, or loans made to ...
  4. B/C Loan

    A classification of loans associated with the borrowers that ...
  5. Second Chance Loan

    A type of loan associated with subprime lending and borrowers ...
  6. Hard Money Loan

    A loan of "last resort" or a short-term bridge loan. Hard money ...
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. Stock Analysis

    Subprime: Nightmare Scenario

    Remember the savings and loan crisis? Subprime could be worse - much, much worse.
  3. Mutual Funds & ETFs

    Financial Institutions: Stretched Too Thin?

    Find out how to evaluate a firm's loan portfolio to determine its financial health.
  4. Economics

    Understanding Term Loans

    A loan from a bank for a specific amount that has a specified repayment schedule and a floating interest rate.
  5. Economics

    What is a Subprime Mortgage?

    Subprime mortgages are offered to borrowers with low credit ratings, usually 600 or below.
  6. Credit & Loans

    Student Loans: Private Loans

    While federal loans should always be your first borrowing choice, they may not cover your full tuition – never mind lab fees, books, and room and board. That's where private loans come ...
  7. Fundamental Analysis

    Student Loan Asset-Backed Securities: Safe or Subprime?

    Similar to the mortgage-backed securities that caused the 2008 recession, student loan asset-backed securities could lead to the next financial crisis.
  8. Credit & Loans

    When Are Personal Loans a Good Idea?

    You never want to borrow money for frivolous reasons, but these five circumstances might warrant it.
  9. Credit & Loans

    Student Loans: Federal Loan Consolidation

    Federal loan consolidation is a helpful tool for converting an unmanageable payment into a manageable payment by combining multiple semester loans into one loan and extending your repayment schedule. ...
  10. Credit & Loans

    Unsecured Personal Loans: 8 Sneaky Traps

    If you are seeking a personal loan, be aware of these pitfalls before you proceed.
RELATED FAQS
  1. 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 ... Read Answer >>
  2. What are the similarities and differences between the savings and loan (S&L) crisis ...

    Learn about some of the similarities and differences between the savings and loan crisis and the subprime mortgage crisis ... Read Answer >>
  3. What role did securitization play in the U.S. subprime mortgage crisis?

    Learn how the securitization of sub-prime mortgages into asset-backed securities fueled the real estate market crash in 2 ... Read Answer >>
  4. What's the difference between the prime rate and the discount rate?

    Learn more about the prime rate and the discount rate and how the Federal Reserve uses these rates in the U.S. economy. Explore ... Read Answer >>
  5. What are the typical repayment terms for a syndicated loan?

    Learn more about syndicated loans and how they are structured, specifically including the typical repayment terms for a syndicated ... Read Answer >>
  6. What should ordinary borrowers know about the prime rate?

    Learn more about how prime rates are used in consumer lending and how consumers may obtain better interest rates at or near ... Read Answer >>
Hot Definitions
  1. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  2. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  3. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  4. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  5. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
  6. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
Trading Center