The subprime credit market is a part of a financial market that specializes in offering loans and credit facilities to those with bad credits and/or little credit history. Pricing strategy in this market also presents several key aspects in particular relating to the capacity of this market in providing credit access to those who would otherwise not be able to access credit within conventional funding models.
Subprime market in the US was largely marginal until the mid 1990 as mainstream large full fledged banks and numerous specialist non-mainstream subprime lenders realised the export potential and the highly sizeable profits to be garnered from easing up on credit scores to enable people with poor or no credit scores at all to buy a house, a car, start a business or even pursue college education.
To capture these increased margins to interest rates, the lenders then included this segment into their conventional lending business. For most traditional lenders, this simply meant producing loan products at different rates for the credit worthiness of the applicant.
High Risk: The borrowers in this market have been classified by having a propensity of missed payments, high debt levels or bankruptcies thus making them high risk for the lenders.
Higher Interest Rates: As mentioned, subprime borrowers have higher default rates than the prime borrowers hence most lenders set higher interest rates with subprime borrowers.
Types of Products: Subprime market combines a number of financial products including personal loan, auto loan, mortgages known as subprime mortgages.
Lenders: Subprime lenders can be classified as normal banks, credit unions, and other players in the segment. Some of the market players target only the subprime borrower segment.
Regulation: Subprime market has witnessed regulation after the recent subordinate mortgage crisis due to the crucial subprime mortgage market.
Impact on Economy: Health of the subprime market can have a priceless bounce on the economy. When there are high levels of defaults this leads to more financial risks.
Predatory Lending: Some subprime lenders harass borrowers by attracting them with excessive charges or by trapping them in debt with unreasonable interest rates.
Default Rates: Therefore, acquiring subprime credit is indicative of a high default rate, significant losses for the lender, and potentially detrimental economic consequences.
Fintech Influence: New entrants in the financial market through fintech provide more choices for subprime borrowers due to the contribution of the use of technology in the credit assessment process.
Credit Scoring Innovations: The suggested credit metrics, such as new evaluation criteria for credit risk, which may include new data (for example, utility payments), may free up credit for non-prime customers.
The ethical perspectives of the subprime credit market for consumers with restricted usage of conventional credit becomes more important with the raising consciousness about predatory lending. It is a gradual step towards meeting consumer needs and protection of them within the fiscal lending services industry that seeks to entail a more balanced environment for borrowing products.
