Subprime

Glossary

Banking

Subprime

Subprime, applied to mortgage lending and consumer finance, is an umbrella term describing the range of financial products extended to customers with poor credit scores and/or high debt leverage (including student debt), client demographics like the self-employed or those with gaps in their credit histories, those with no collateral to put up as security, or those with histories of past defaults or bankruptcy orders against them. Subprime products come with a higher degree of default risk from the perspective of lenders so interest rates on subprime products are higher. However, the provision of subprime financial products provides access to clients who do not qualify for standard (prime) financial products. In the run-up to the 2007-2008 global financial crisis, predatory US subprime mortgage lenders lent hundreds of billions of dollars in subprime mortgages. These were subsequently repackaged and re-packed into complex structured products that were sold world-wide. When the US real estate bubble burst, these securities collapsed in value, lighting the touchpaper to a global economic and financial meltdown.

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