A type of loan offered to borrowers with lower credit scores, limited credit histories, or other characteristics that increase their risk of default. Because of this higher perceived risk, subprime loans typically carry higher interest rates and less favorable terms than loans offered to “prime” borrowers with stronger credit profiles. Subprime loans are commonly used for mortgages, auto loans, and personal loans.
Borrowers may be considered subprime if their FICO score is below 620, they have recent delinquencies, or a high debt-to-income ratio. While subprime loans provide credit access to those who may not qualify under standard underwriting guidelines, they also carry greater risks for both lenders and borrowers.
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