A subprime loan means lending an amount below 'prime' rate of interest to people with low credit ratings. It is given to people with an imperfect credit profile or those likely to be defaulters. This makes recovery of a subprime loan very risky for the financial institutions who lend these loans. This lending is in two forms: credit cards and mortgages.
This type of lending system evolved during 1993, when the financial institutions realized that there was a high demand for loans despite low creditworthiness. In a frenzied urge to earn more, the banks began lending below the prime rate even though many borrowers qualified for prime loan bracket.
The purpose of borrowing such loans is property purchases, cars purchases, remodeling homes, meeting living expenses or even repaying the high interest on credit cards. A few mortgage lenders which are top on the list are:
- Quicken Loans - Best Overall
- Alliant Credit Union - Best for First-Time Buyers
- First Internet Bank - Best for Refinancing
The banks sold loans on mortgages which were an extremely profitable business, encouraging them to sell more. Due to negligible lending rate, borrowers surged exponentially. Low interest rates and high property prices led to growth of subprime market.
In the successive years, this market has made radical effects on the global economy. The impact was first felt in US, when the tremors of subprime crisis jolted the inner-city areas. By this time the wave of repossession was sweeping across the continent. As a result, the housing sector experienced a national decline on a massive scale.
Today, the builders have been forced to reduce their prices to do away with the unsold property. This in turn, has affected the construction industry, making the big construction players suffer losses and the small ones already calling in a closure.
The downturn in the economy has also affected the luxury goods market, home appliances market and most importantly the automobile market. The historic economic turmoil has seen a loss of roughly one million jobs.
The banks are now cutting down on their credit availability and are clearly refusing applications for credit cards, mortgages, and loan for property purchases. The value of subprime mortgage loans is estimated to be at USD1 trillion.
The financial institutions are now adopting the policy of foreclosure to deal with the mayhem of such lendings. This has caused clusters of vacant neighborhoods and sharp drops in property values. Homeowners face high-priced mortgages and low property values. The global investors fear that subprime loan crises may be rooted deeper than it actually looks.
A huge chunk of subprime market is expected to regain its shape through foreclosures. This will have an adverse effect on neighborhoods, exposing it to crime, robbery, and theft.
The efforts taken for the betterment of neighborhood in the US are feared to be lost in this colossal chaos. While the government will try fixing the problem of subprime loans, the cities will have to deal with the horrors of devastated homes.