Subprime Rates
What Are Subprime Rates?
Subprime rates are higher than average interest rates charged to [subprime borrowers](/subprime-borrower, for example, on loans to individuals with [poor credit scores](/awful credit) from at least one credit bureau. Subprime rates will be higher than prime rates for a similar type of loan, in spite of the fact that there is no precise amount or spread that comprises subprime.
Figuring out Subprime Rates
Subprime rates can be altogether higher than rates on loans to more creditworthy "prime" borrowers.
Factors that influence subprime rates incorporate the size of the loan, the income of the individual, the number of delinquent accounts on the borrower's credit report and the amount of the down payment for a given loan. A subprime borrower is a person viewed as a somewhat high credit risk for a lender. Subprime borrowers have lower credit scores and are probably going to have various negative factors in their credit reports, like delinquencies and account dismissals. Subprime borrowers may likewise have a "thin" credit history, meaning they have next to zero activity in their credit reports on which lenders can base their choices.
Subprime lenders use what is called "risk-based pricing" to determine how much interest to charge on a given loan or class of borrower. This pricing method might change as economic conditions change in the broad financial markets.
The term subprime gets its name from the prime rate, which is the rate at which individuals and organizations with an astounding credit history are allowed to borrow money. Subprime rates may be applied to home mortgages as well as to car loans and rents, especially for cars offered with no money down or for purchasers with limited or poor credit accounts.
Why Subprime Rates Draw Scrutiny from Regulators
The heightening of subprime rates has been refered to as one of the contributing components to the housing and mortgage crisis. The higher rates were noted as additional homes passed into foreclosure as the borrowers couldn't keep up with the payments.
A concern in regards to subprime rates is that borrowers who couldn't in any case bear the cost of real estate, cars, credit card, or other financing can assume more debt than they can realistically stand to pay off. The basic interest rate may be lower, making it appealing to additional borrowers. While they might be offered this financing with what seems, by all accounts, to be sound deal, the terms and interest obligations can lead to the borrower building up expanding amounts of debt without making substantial gains in decreasing the outstanding balance they owe. When the starting period has passed, the borrower will face the subprime rates as long as necessary.
The mounting interest under subprime rates could lead to the borrower facing more debt than the original asset is worth on the market. This can be a specific issue with mortgages and the resale of homes. The subprime rate can heighten debt to the point where the borrower can't bear to keep on making payments. Besides, putting the house available to be purchased offers no solution in the event that the debt offsets any gains a purchaser's bid could offer.
The federal government has recently negotiated with the credit industry to briefly freeze subprime interest rates to stem the tide of foreclosures in housing.
Highlights
- Subprime rates are higher than average interest rates charged on loans to riskier borrowers.
- The higher interest rate is planned to make up for the greater degree of risk and higher probability of delinquency or default on these loans.
- These rates are offered, for example, to borrowers with a poor or thin credit history or low credit score.
