Subprime Credit
Contents
Exploring Subprime Credit: Risks and Rewards
Unveiling the World of Subprime Credit
Subprime credit, often offered at rates higher than the prime rate, targets borrowers with poor credit histories. These borrowers typically have low credit scores, high debt levels, and a history of delinquency or bankruptcy.
The Mechanics of Subprime Credit
Lenders rely on credit scoring systems, such as FICO scores, to identify subprime borrowers. Loans are repackaged into asset-backed securities like collateralized debt obligations (CDOs) or mortgage-backed securities (MBS) and sold to investors.
Lessons from the Past
The housing boom of the early 2000s saw relaxed lending standards, with subprime mortgages granted to borrowers without income or assets. This led to the subprime crisis, contributing to the Great Recession.