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Subprime Loan
- A type of loan that is offered at a rate above prime to individuals who do not qualify for prime rate loans. Quite often, subprime borrowers are often turned away from traditional lenders because of their low credit ratings or other factors that suggest that they have a reasonable chance of defaulting on the debt repayment.
- Subprime loans tend to have a higher interest rate than the prime rate offered on traditional loans.
- However, getting a subprime loan could still be a good idea if the loan is meant to pay off a higher interest debt (such as credit card debt) and the borrower has no other means for payment.
Teaser Loan
- An adjustable-rate mortgage loan in which the borrower pays a very low initial interest rate, which increases after a few years.
- Teaser loans try to entice borrowers by offering an artificially low rate and small down payments, claiming that borrowers should be able to refinance before the increases occur.
- Teaser loans are considered an aspect of subprime lending, as they are usually offered to low-income home buyers.
- Unfortunately, when these borrowers try to refinance the loan before the rate increases, most will not qualify for standard mortgages.
- This leaves borrowers with increased monthly payments, which many cannot afford.
- This method of loaning is considered risky, as default rates are high.
