Abstract:In this paper we will analyze the subprime market in the United States of America. We will define subprime borrower and lender and also discuss about the risks associated with the subprime market.
Introduction
There are some people who lack a good credit history and therefore they are unable to qualify for the best rates in the current market. Subprime lending is making loans available to such people at a very low rate of interest. Today, almost 25% of the total American population are associated with the subprime market.
There is always a certain amount of risk associated with both the borrowers and lenders involved in subprime lending by reason of the combined effects of poor credit history, adverse financial situations and high interest rates. The term "subprime" reflects not the lending rate but the borrower's credit status.
Subprime Borrower:
Through the subprime market, the borrowers gain access to credit despite a bad credit history. Loans may be availed for purchasing cars, homes etc.
Sometimes they also take it to pay their living expenses or remodel a home. But the main issue is that the borrowers have to take the loan with high interest rates.
Subprime Lender:
To gain access to the subprime market the lenders every now and then have to take risks associated with borrowers of poor credit history.
However, they use several methods to minimize the risk factors. One of them is imposition of high interest rates.
For subprime credit cards, the lenders impose high over limit or late fees to reduce the risks.