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What is subprime credit?

(investopedia.com)
Updated: 2008-09-22 09:49

General term for borrowings of subprime debt, or loans made to people with less-than-perfect credit or short credit histories. Subprime credit includes the original borrowing itself, as well as any derivative products such as securitizations that are based on subprime loans and then sold to investors in the secondary markets.

A big portion of the total market for subprime credit is based on subprime mortgages, or home loans to borrowers of questionable creditworthiness.

Subprime credit has highly debated pros and cons; on the plus side it allows people who wouldn't otherwise have access to credit to obtain loans for things like automobiles, homes and credit cards. On the negative side, subprime credit can come with very unfavorable terms based on high interest rates, excessive fees and short grace periods.

Securities that use subprime credit as collateral have become widespread in the marketplace, with billions of dollars in collateralized debt obligations (CDOs) owned by investors that are based on the cash flows from subprime credit.