What is "subprime financing"?

Subprime financing refers to loans that are extended to individuals who have poor credit histories or low credit scores. These borrowers typically have a higher risk of defaulting on loans due to their credit profiles, which may be affected by factors such as past delinquencies, high debt-to-income ratios, or public records like bankruptcies. Lenders may offer subprime loans with higher interest rates to compensate for the increased risk associated with lending to these customers. This makes subprime financing a crucial aspect of the broader credit market, enabling those with less favorable credit histories to access financing options that might otherwise be unavailable.

In contrast, loans for customers with excellent credit histories are often considered prime loans, which generally come with lower interest rates and better terms. Loans that are provided exclusively by dealerships or that require high collateral differ significantly from the characteristics of subprime financing, emphasizing various aspects of the lending process rather than targeting borrowers with poor credit.