What characterizes a subprime loan?

A subprime loan is characterized by higher interest rates due to the increased risk associated with lending to borrowers who have lower credit scores or insufficient credit history. Lenders impose these higher rates to compensate for the greater likelihood of default among subprime borrowers. These loans are typically offered to individuals who may not qualify for prime loans, which are reserved for borrowers with strong creditworthiness.

This elevated interest rate is a reflection of the added risk that lenders undertake when providing credit to individuals with less reliable financial backgrounds. Subprime loans often come with additional fees and less favorable terms compared to prime loans, further emphasizing the risk involved for both the borrower and the lender.

In contrast, options that suggest lower interest rates or are designed for highly qualified borrowers do not align with the characteristics of subprime loans. Additionally, while some loans may not require extensive background checks, the defining feature of a subprime loan is its association with higher interest rates due to perceived borrower risk.