Sub-Prime Loans

A sub-prime loan is simply one of any kind that is made to someone with less than a good credit rating. It could be a credit card, a mortgage, a pay check loan, absolutely any form of lending money to someone with less than good credit are sub-prime loans.

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There has, and always will be, some concern over such sub-prime loans. They always charge a higher interest rate than loans for those with good credit, for example. The fact is that people have less than good credit for a reason: they haven’t paid back some other loan at an earlier date, or they haven’t taken out any loans so no one knows the risks. This makes them less likely to pay back the new one, or so the reasoning goes. Being less likely to pay back a loan is the same as saying they are more risky and as always in financial markets, risks mean higher prices. Indeed, the default rates (the number of people who don’t pay back the loan on time) are higher for sub-prime loans.

On the plus side for sub-prime loans is the fact that they allow people who simply could not get onto the housing ladder to take part in the American Dream, and buy their own home. This is part of what has been behind the growth in the number of Americans who own their own home: sub-prime mortgages becoming available. So while the interest rates charged on sub-prime loans will be higher because they are loans to people with low credit ratings, that is in fact the entire point: to allow people with low credit ratings to borrow money and thus buy houses.