GLOSSARY: Subprime financing
What is subprime financing?
The term subprime financing refers to loans given at a rate below prime.
These loans are known as subprime credit. Subprime borrowers are often rejected by traditional banks for loan applications as their credit rating does not score high enough and there is a reason to believe that they might not make their loan repayments.
Alternative financial institutions or solutions are available that do provide loans to subprime consumers, but the terms are less favorable and importantly the interest rate will be higher than that offered to applicants with a higher credit rating (prime borrowers.)
The specific amount of interest charged on a subprime loan will fluctuate and will not be the same for all loans and lenders.
Certain point of sale solutions offer regular installment loans to subprime consumers. This is because they measure credit rating according to their own system.
Is subprime financing bad?
Subprime financing involves loans that are given below the prime rate, and therefore charge a higher interest rate than a conventional loan. As a positive, they provide financing for individuals who would otherwise not be able to get a loan. Depending on the loan provider, if the consumer is able to pay back the installments regularly and on time, this will help improve their current credit rating.
However, these loans can also be known as ‘predatory loans’ which only serve to continue the cycle of debt. Borrowers often default on these loans due to high-interest rates and various penalties.
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