Subprime loans are loans made to people with a less-than-perfect credit history. The target market for subprime loans is borrowers with high debt levels relative to their incomes and credit "blemishes" ranging from a few late payments to judgments, bankruptcies, and foreclosures. Other subprime borrowers lack a credit history and are categorized as subprime because there is nothing in their credit file for lenders to review.
In years past, many subprime borrowers probably would not even have qualified for a loan or credit card. Today, they are often extended credit, but at a high cost. Subprime borrowers pay more than prime borrowers (i.e., those with a good credit history -- often a FICO credit score of more than 700) to borrow the same amount of money. Subprime lenders use risk-based pricing. People who are perceived to be a greater credit risk are classified into lower-rated tiers and charged accordingly.
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