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Subprime – What Exactly is Subprime?

Posted on | February 9, 2009 | 4 Comments

Subprime is considered to be an individual or entity that is below the requirements to meet prime borrowing guidelines.  Those who are subprime have a heightened risk of default due to previous loan default or delinquency.  They may also have filed for bankruptcy of have limited debt experience.  There is no true definition, but those with a FICO credit score below 650 are considered on the border for a subprime loan.

In 2006, prior to the financial crisis, the Wall Street Journal reported that 61% of all borrowers receiving subprime loans had credit scores high enough to qualify for conventional, prime loans.  This is quite disturbing to think about when we look at our current financial situation.  If those borrowers had done their research and signed conventional, lower rate loans, it is likely that many of the problems we are currently having would not exist.  There is no way to determine what would happen, but if 61% of borrowers saved at least one percentage point on their mortgages, BILLIONS of dollars would have been saved over the last two years.

Subprime started in 1993 when lenders realized the high demand for loans to high-risk borrowers.  Statistically, one fourth of Americans have impaired credit or have limited debt experience.  The market for subprime loans is quite large and many lenders felt the need to jump on this opportunity.  The lenders knew that they were giving risky borrowers with little debt responsibilty large sums of money.  They also knew that these borrowers had a good chance to default.  This is why we should have no sympathy towards the lenders.  They knew what they were getting into and they should go bankrupt!

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4 Responses to “Subprime – What Exactly is Subprime?”

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