Q? What is sub prime lending?
B>A! Sub-prime lending refers to loans and credit facilities granted to consumers with C-D credit ratings who cannot obtain credit from traditional lenders. As an alternative financing source, sub prime is considered a high risk lending format that provides an additional credit financing option in the marketplace.
Q? Why won’t traditional mainstream lenders lend to these individuals?
A! The credit risk is deemed to high for mainstream lenders given poor credit score, past bankruptcy, lack of proof of income, low net worth, existing debt service payments, lack of stability of employment and or residence, insufficient equity and/or lack of down payment.
Q? What interest rates do sub prime lenders charge?
A! Sub prime interest rates vary greatly but are generally comparable to credit card interest rates (A typical department store credit card is 28.8% per annum). Pricing is a function of risk level, administration costs and required profitability.
Q? What are the higher risks and costs for a sub prime lender?
A! They include greater percentage of loan defaults, larger bad debt expense, higher portfolio administration, collection and loan recovery costs and a higher “cost of funds” (money used to lend to consumers).
Q? What purpose do sub prime lenders serve in the marketplace?
A! The development of the sub-prime market has made credit available to a growing segment of the population that otherwise would have no access to credit to purchase consumer durable goods. It has also been credited with assisting lower income individuals and communities with creating equity, building wealth and enhancing local economies. In addition, retailers of durable goods (cars, furniture, home appliances etc.) actively utilize the financing services offered by sub prime lenders to increase sales volumes, move inventory and provide service to new customers. Assuming the lender sets interest rates in accordance with risk, that the credit loans do not include high fees or abusive lending scenarios, they are both a legitimate and necessary component of the lending market.