What is a subprime loan?

A subprime loan is designed specifically for borrowers with poor credit histories who may not qualify for conventional loans. This type of loan typically comes with higher interest rates compared to prime loans to compensate for the increased risk that lenders take on when extending credit to these borrowers. The rationale is that individuals with a history of missed payments, defaults, or bankruptcies are viewed as higher-risk borrowers. Consequently, lenders position subprime loans as a means to extend credit and provide financial opportunities, albeit at a higher cost.

Other options presented do not accurately define a subprime loan. For example, loans for borrowers with excellent credit (the first option) pertain to prime loans, which typically have more favorable terms due to the borrower's strong creditworthiness. Government-backed loans (the third option) often come with specific requirements and protections and are generally made available to a wider range of borrowers, not limited to those with poor credit. Lastly, a loan for properties in foreclosure (the fourth option) refers to a specific situation relating to real estate, rather than a classification of borrower creditworthiness, which is the critical factor distinguishing subprime loans.