When a lender deems that it is an unusually high risk to extend credit to an individual, whether due to current or past financial information, the person in question is labeled as a subprime borrower. This can be due to the person’s credit history or his or her income, or be based on the amount of debt an individual has. A person who is considered as such will likely be required to make a higher down payment, pay higher interest rates, or may not be eligible for certain financial products.
In most cases, a person receives this label due to his or her credit history. In many countries, public records are kept that track a person’s history of credit, including whether or not payments were made on time and if the account is still active. An individual who routinely does not pay bills as scheduled will generally have poor credit, and is therefore considered to be risky to lenders because there is a greater chance that the bank or organization will not receive the money that it lent back. In the same vein, a person with no credit history is also often labeled as a subprime borrower because there is little to no proof that the individual pays his or her bills as agreed.
Oftentimes, a person’s income may also be factored into how risky they are to a lender. This can include the source of the income, how long a person has been at his or her job, or the actual amount of money that he or she takes home. If a person has not been working in the same place for long, a lender may view his or her primary source of income as temporary. In addition to this, not making enough money to cover one’s basic living expenses can also cause a person to be labeled as a subprime borrower.
Carrying too much debt is often frowned upon by lenders, even if a person pays his or her bills on time. While this is not the only determining factor when it comes to defining a subprime borrower, when coupled with a bad credit or inadequate income, too much debt can make a person incredibly risky to a lender. In most cases, this is typically an issue when a person routinely has revolving credit, such as lines of credit or bank cards, charged to the limit and only pays the minimum each month. Typically, this indicates that a person is spending all of his or her income on debt rather than actually having any liquid assets.
Although there are several factors that determine whether or not a person is considered to be a risky borrower, being labeled as such typically means that credit is more expensive and much more difficult to obtain. For larger purchases, a subprime borrower will often have to make a significant down payment to prove his or her investment in the item to the lender, as well as to reduce some of the financial risk to which the lender is agreeing. An increase in interest rates on credit, whether a loan or revolving credit, is also common, and basically means that a person will have to spend more on the same amount of credit as an individual with good credit would. In addition, a subprime borrower is often not eligible for credit at all, especially from more established financial institutions, making it extremely difficult for the individual to make large purchases.