Subprime

In finance, subprime lending (also referred to as near-prime, subpar, non-prime, and second-chance lending) is the provision of loans to people in the United States who may have difficulty maintaining the repayment schedule. Historically, subprime borrowers were defined as having FICO scores below 600, although this threshold has varied over time.

These loans are characterized by higher interest rates, poor quality collateral, and less favorable terms in order to compensate for higher credit risk. Many subprime loans were packaged into mortgage-backed securities (MBS) and ultimately defaulted, contributing to the financial crisis of 2007–2008.Lemke, Lins and Picard, ''Mortgage-Backed Securities'', Chapter 3 (Thomson West, 2013 ed.).

Defining subprime risk

The term ''subprime'' refers to the credit quality of particular borrowers, who have weakened credit histories and a greater risk of loan default than prime borrowers.
As people become economically active, records are created relating to their borrowing, earning, and lending histories. This is called a credit rating; although covered by privacy laws, the information is readily available to people with a need to know (in some countries, loan applications specifically allow the lender to access such records).
Subprime borrowers have credit ratings that might include:
* limited or no debt experience;
* limited or no possession of property assets that could be used as security (for the lender to sell in case of default);
* excessive debt
* the known income of the individual or family is unlikely to be enough to pay living expenses, plus interest and repayment;
* a history of late or sometimes missed payments;
* failures to pay debts completely (default debt);
* legal judgments such as "orders to pay" or bankruptcy (sometimes known in Britain as County Court judgments or CCJs).

Lenders' standards for determining risk categories may also consider the size of the proposed loan, and also take into account the way the loan and the repayment plan is structured, if it is a conventional repayment loan, a mortgage loan, an endowment mortgage, an interest-only loan, a standard repayment loan, an amortized loan, a credit card limit or some other arrangement. The originator is also taken into consideration. Because of this, it was possible for a loan to a borrower with "prime" characteristics (e.g. high credit score, low debt) to be classified as subprime.

Proponents of subprime lending maintain that the practice extends credit to people who would otherwise not have access to the credit market. Professor Harvey S. Rosen of Princeton University explained, "The main thing that innovations in the mortgage market have done over the past 30 years is to let in the excluded: the young, the discriminated against, the people without a lot of money in the bank to use for a down payment."

Student loans

In the United States the amount of student loan debt surpassed credit card debt, hitting the $1 trillion mark in 2012. However, that $1 trillion rapidly grew by 50% to $1.5 trillion as of 2018. In other countries such loans are underwritten by governments or sponsors. Many student loans are structured in special ways because of the difficulty of predicting students' future earnings. These structures may be in the form of soft loans, income-sensitive repayment loans, income-contingent repayment loans and so on. Because student loans provide repayment records for credit rating, and may also indicate their earning potential, student loan default can cause serious problems later in life as an individual wishes to make a substantial purchase on credit such as purchasing a vehicle or buying a house, since defaulters are likely to be classified as subprime, which means the loan may be refused or more difficult to arrange and certainly more expensive than for someone with a perfect repayment record.

United States

Although there is no single, standard definition, in the United States subprime loans are usually classified as those where the borrower has a FICO score below 600. The term was popularized by the media during the subprime mortgage crisis or "credit crunch" of 2007. Those loans which do not meet Fannie Mae or Freddie Mac

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