Subprime lending with respect to credit is when a lender is offering or issuing credit to the riskiest category consumer. In other words to people that have a below average credit rating. There is no standard definition of what a Subprime customer is, however in the United States a person with a FICO score of 640 or below could be considered with a Subprime credit score.
For anybody in this category, it will mean that credit is issued at a higher rate than that of someone out of the Subprime credit range and with less favourable terms. Subprime credit scores will affect most types of lending such as credit cards, vehicle loans and mortgages.
Typically, but not always, a person with a Subprime credit score may have entries on their credit reports for items such as excessive debt, missed payment history, lack of credit history, bankruptcies and similar credit defaults.
Because people in the Subprime credit score range have generally had financial or credit problems of some degree, future credit applications will likely be harder to get. In addition any conventional lending may be declined and only a higher rate product being granted. Lenders have seen the increase in Subprime credit scores and have produced a sliding scale interest arrangement on their credit products. This basically means that the higher the risk of the applicant, with a low credit score, the worse the terms, charges and interest will be from the credit arrangement. However, these products are the only option for many Subprime customers with low credit scores and they can act as a stepping stone to improving credit and even moving out of the Subprime credit score range, if used sensibly.
Statistically, credit that has been taken out by people in the Subprime credit score range have a higher rate of default, which is why lenders use the higher charges, fees and interest rates to offset these losses.
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