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What Is Subprime Lending?
Posted On 29/07/2019
A subprime loan is issued to persons who have a bad credit history and whose financial capabilities are insufficient to obtain a loan under standard conditions. For example, you do not need to submit a certificate of income. On the other hand, they require noticeably more effort from the borrower to pay it. But still, the simplicity and speed of obtaining a subprime mortgage is a very attractive factor for many people.
Positive Aspects of Subprime Loan
A subprime mortgage is not as bad as it seems at first glance, and in certain situations, it may be the only acceptable option. It should be noted that many people have a stable source of income, which is not recorded anywhere in legal terms. This can be attributed to remotely working people on the Internet and some entrepreneurs. Their income may allow them to take a loan to buy a home. Subprime loans are suitable for such people.
The big minus of a subprime loan is its high cost. High interest is a kind of compensation for the risk that a bank determines by allowing people with a bad credit history and without an initial payment to get money. In addition to the high-interest rate, subprime credit has increased fees and fines. As a general rule, the fewer the chances to get a classic loan a borrower has, the more expensive it will be for him or her to get subprime lending.
For example, today, the average rate on mortgage loans is 13 per annum. If the borrower is not able to make a down payment, then, as a rule, the rate increases by two to three percent. If the borrower has no money for a commission, then the bank is ready to add it to the principal amount of the loan.
Refusing insurance on a loan, the borrower may be obliged to pay a certain commission each month, which may raise the rate by four or five percent.
Problems with credit history can also turn into a whole set of financial burdens. In addition to excessive interest and commissions, the borrower will still be required to purchase a full package of insurance policies from the bank’s partners.
Banks form the conditions of subprime loans differently. In some cases, all credit risks are taken into account in advance, and the interest rate is formed. In others, banks develop a complex accrual system in which their borrowers overpay even more than with a conventional loan. In this case, subprime lenders simply enjoy the hopeless position of the borrower, seeking the maximum benefit for themselves. However, those who want to get a loan do not particularly think about it, being satisfied that they managed to get such a facilitated loan.