subprime
Referring to borrowers or loans with below-average creditworthiness, typically carrying higher interest rates to compensate for elevated default risk.
Example
“The 2008 financial crisis was triggered in part by the collapse of the subprime mortgage market.”
Memory Tip
SUBprime = SUB (below) PRIME quality. Higher risk, higher rates.
Why It Matters
Understanding subprime lending is crucial because it directly affects loan availability and costs for people with lower credit scores. If you fall into the subprime category, you will face significantly higher interest rates and fees, which can cost you thousands of dollars more over the life of a loan compared to borrowers with better credit.
Common Misconception
Many people believe that subprime loans are always predatory or should be completely avoided, but sometimes they represent the only borrowing option for individuals rebuilding their credit. A subprime loan can actually be a legitimate stepping stone toward improving creditworthiness if managed responsibly and paid on time.
In Practice
A borrower with a credit score of 580 might qualify for a subprime auto loan at 18 percent interest on a 30,000 dollar car, paying approximately 540 dollars monthly for 72 months. Meanwhile, a borrower with a 750 credit score could get the same car at 6 percent interest, paying only 215 dollars monthly, resulting in a difference of over 26,000 dollars in total payments over the loan term.
Etymology
From Latin 'sub-' (under, below) + 'primus' (first, best). BELOW PRIME quality loans.
Common Misspellings
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Related Terms
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