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What is Sub-Prime Lending?

A-Level, IB
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Last updated 26 May 2023

Subprime lending refers to the practice of providing loans to individuals or businesses that do not meet the standard criteria for creditworthiness. These borrowers are considered to be at a higher risk of default and are therefore typically charged higher interest rates.

Subprime lending is most commonly associated with the mortgage market, where subprime borrowers are often people with poor credit histories, low incomes, or high levels of debt. They may not have the ability to make a large down payment, have trouble showing a stable income, or have a history of defaulting on loans. Subprime mortgages can also include adjustable rate mortgages, where the interest rate on the loan can change over time, which can make it difficult for borrowers to make their payments.

The subprime lending market grew rapidly in the early 2000s, as many lenders began to relax their standards for borrowers and offer increasingly risky loans. This led to a significant increase in the number of subprime mortgages being issued, many of which were later shown to be unaffordable for the borrowers who took them out.

When the housing market began to decline in 2007, many subprime borrowers began to default on their mortgages, leading to significant losses for the lenders and investors who had provided the loans. This contributed to the global financial crisis of 2008, which had far-reaching economic consequences.

As a result of the crisis, the subprime lending market has shrunk significantly, with stricter regulations in place to ensure that lending standards are maintained. The practices and regulations regarding subprime lending are still under scrutiny and in some places, the regulations have been put in place to prevent the predatory lending practices that led to the financial crisis.

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