What is a Subprime Loan?

A subprime loan is a loan made to someone who wouldn't or couldn't qualify for a loan from a financial institution using existing credit law as set out as guidelines for safe lending practices under existing legislation. This legislation is either Federal or State law.

There are any number of reasons as to why a person may not qualify for a loan under standard credit lending criteria but this wouldn't stop a less ethical institution from making the loan. However, they would have, and did have, exorbitant loan repayment schedules that the mortgagees weren't able to comply with to meet their monthly mortgage payments.

In Australia back in1982 when we applied for our first home loan, the bank was not able to loan us above 90% of the purchase price required. These laws were put in place to protect the lender from unnecessary defaults on payments and the borrower from over extending their financial commitments. This meant that every person applying for a loan had to have a 10% stake of their own money in the residence.

When I looked at getting another loan from a mortgage broker in 2003 all I needed was to have a 5% deposit on the new residence. Needless to say, we didn't go ahead with the investment property with the home mortgage broker but went with the bank again. These are all decisions that have to be investigated and evaluated before you sign anything.

Taking out any monetary loan is a business decision. If the loan is to be repaid over twenty five years then that means that you will be paying that bank or that financial institution money every month for the next quarter century.

This is where I think a lot of people have forgotten to remember. And a subprime loan is made on the agreement that the person accepting the loan will be paying a lot more money back to the mortgager than that originally borrowed because they have accepted the money on a higher interest rate and some of these loan repayments have been made with minimal payments in the beginning because then the interest is accrued on the biggest amount of the loan.