What defines a subprime loan?

A subprime loan is characterized by being offered at a higher interest rate primarily because it is extended to borrowers who are considered less creditworthy compared to prime borrowers. These individuals may have lower credit scores, limited credit history, or other factors that indicate a higher risk of default. Due to this increased risk, lenders charge higher interest rates on subprime loans to compensate for the potential financial losses that may occur if the borrower fails to repay the loan.

Subprime loans often serve a specific market need, allowing individuals who may not qualify for traditional loans to receive funding, but at a cost that reflects their credit risk. This higher rate is necessary for lenders to manage the inherent risk associated with lending to these borrowers.