What defines subprime loans?

Subprime loans are specifically designed to cater to borrowers who have poor credit histories. These individuals may struggle to qualify for traditional loans due to their credit ratings, which reflect past financial behavior such as late payments, defaults, or bankruptcies. Subprime loans typically come with higher interest rates than prime loans, compensating lenders for the increased risk of lending to borrowers with lower credit scores. This type of loan is an essential financial tool that allows those who might otherwise be excluded from the housing market the opportunity to borrow money, albeit at a higher cost.

Other choices do not accurately describe subprime loans: loans for high-profit businesses do not pertain to the creditworthiness of individual borrowers, loans for first-time homebuyers might include prime and subprime options and thus are not exclusive to subprime characteristics, and government-guaranteed loans, such as FHA loans, can be offered to various borrowers regardless of their credit history.