A one paragraph summary of subprime lending and how it factored into the financial crisis.

Expert Solution

Subprime Lending

The type of loan offered that is given at a rate more than the normal or the prime or prevailing rate to individuals who do not get loans on prime rates due to any reasons. High rate of interests, poor quality collateral, and less favourable terms in order to compensate the higher risk are the main drawbacks of subprime loans. There are high cases of defaulters in subprime loan cases. Subprime loan borrowers have low credit rating and there are high chances of their being defaulters on the debt repayment and because of these reasons they are often turned down and not kept at par as the normal borrowers by the traditional lenders.

When the applicants for loan are unable to get loan due to any reasons they are given loans at an highet interest rate. Thus, the interest rates are too high when compared to normal and regular interest rates. When the applicants are not getting normal loans that itself clarifies that they are not capable of paying interest back or are not worth of getting that loan, but still they get subprime loan on a higher rate of interest then it is very much obvious that they are not in a position to repay the loan and they become defaulters. This situation forces them into financial crisis.

Rahul Sunny answered 2 years ago

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