Sub-Prime Lending

Sub-prime lending is a class of lending that is also known as B-paper, near-prime, or second-chance lending. It basically involves the offering of loans at a higher rate than the prime rate. In the United States mortgage lending area specifically, the term applies to loans that do not meet the Fannie Mae or Freddie Mac guidelines.

Lending at a sub-prime rate is risky for both lenders and borrowers. It is risky due to a combination of high interest rates, allegedly poor credit histories, and potentially adverse financial situations. The credit histories are risky as frequently people who take out sub-prime loans have a history of defaulting on their loans. Despite this, many people who are given loans at sub-prime levels are actually eligible for prime rates.

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To combat the risks of sub-prime loans, lenders offer the loans at a higher interest rate than prime loans. This practice is, to say the least, highly controversial. Proponents of the practice are of the opinion that the sub-prime market allows people who would otherwise be shut out of the credit market to have access to credit. Having access to credit allows them to buy homes, cars, etc. and re-build their credit scores.

Unfortunately, there are also valid concerns of opponents of the sub-prime practice. Opponents of the market allege that subprime lenders engage in predatory lending policies. It has been alleged that the lenders deliberately target borrowers who have no chances of understanding what their loan papers say. This problem was seen in many people who were shocked when their mortgage interest rate exploded in early 2007. In addition, the lenders frequently lend to people who can't possibly meet the terms of their loans.

Frequently in sub-prime loans, there are exorbitant hidden fees as well as hidden terms and conditions. These loans frequently lead to people defaulting on their payments, seizure of collateral, and foreclosure and repossession of homes and cars respectively.

In addition to the other negative allegations, there have been some reports and charges of mortgage discrimination. This is generally based on race. What this means is that lenders will offer people of one race a sub-prime loan rather than a prime loan, regardless of their credit or whether or not the person qualifies for a prime rate.

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