Subprime Consumer Lending
Subprime consumer lending is when banks and other financial institutions
loan money to borrowers with questionable credit. It is called subprime
because these are not ideal borrowers.
What is subprime consumer lending? This is when banks and other
lenders loan money to individuals who would otherwise not be able
to borrow money due to their low credit scores and poor credit history.
There has been a lot of talk lately about subprime consumer lending
and how it contributed to the housing market decline.
Overall, the subprime consumer is one of the fastest growing financial
groups. As the economy declines and prices continue to rise for
basic goods like gasoline, food, heating and cooling, we will see
many more people fall into the subprime borrower category. That
is why subprime consumer lending has become such big business.
Do not confuse subprime consumer lending with predatory
consumer lending although they both target the same demographics,
however predatory lending tends to seek out those who are the most
desperate. Subprime consumer lending by legitimate financial institutions
can be a good thing. It allows borrowers who need money to reestablish
their credit. It also enables those individuals who have no credit
at all to establish credit. Bona fide subprime consumer lenders
offer a valuable service. Many times, they are able to help people
purchase their first home, their first car, or many can help a person
in financial trouble refinance their debts into a lower payment.
This can be a big help to a financially responsible person who is
just starting out or it can help a person with a few problems in
the past reestablish credit. When this type of credit is abused,
that is when the trouble begins.
Here is one way that subprime
consumer lending can get people into trouble. Take for example
Pam who had a lot of credit card debt, a high rate mortgage of 8.5%,
and a car loan. She is having trouble making her payments, especially
the credit cards at 19% interest rates.
Therefore, she refinances the house, wrapping up all of the debt
into a single loan, with an ARM that had an introductory rate of
5%. This rate will adjust up in 2 years to 7%. Here is where she
gets into trouble. Now that the credit cards are paid off, instead
of putting them away and using them for emergency only (those fabulous
Prada shoes on sale is not an emergency) she continues to use them
and shortly maxes them out. Now, she has those high minimum monthly
payments again, and she has the mortgage to pay as well. Come two
years later, the mortgage goes up, the credit cards are in arrears
and she cannot make ends meet. Pam has a big problem. Was this caused
by the subprime consumer lender? No, Pam's troubles were caused
by Pam's irresponsible use of credit. All the lender did was to
loan her money. As long as there was no fraud involved and the subprime
consumer lender disclosed all rates and fees, Pam is the one
at fault.
The above scenario is too common. As a result
the subprime consumer lending market gets blamed for all of
the troubles that Pam and people like her experience. In this circumstance,
reputable subprime consumer lenders are getting a bad reputation.
Perhaps we as a country need to teach financial responsibility to
our youth. It is time to stop blaming everyone else, get the education
in place to teach financial responsibility to our children and college
students. This is how to end problems with subprime consumer lending.
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