Subprime loan

A type of loan that is offered at a rate above prime to individuals who do not qualify for prime rate loans. Quite often, subprime borrowers are turned away from traditional lenders because of their low credit ratings or other factors that suggest that they have a reasonable chance of defaulting on the debt repayment.

Subprime loans have a higher interest rate than the prime rate offered on traditional loans. The additional percentage points of interest often translate to tens of thousands of dollars worth of additional interest payments over the life of a longer term loan. It is meant to compensate the lender for the additional risk that is taking on a subprime borrower.

Subprimes loans represented about 20 per cent of the $3-trillion US mortgage market in 2006. Hundreds of billions of dollars' worth of subprime mortgages have been gathered together and resold as bonds to hedge funds and banks all over the world. The buyers could used them as collateral to secure more loans so they could buy more bonds and so on and so on.