It is because of this reason that various banks and financial institutions have developed their internal rating methodologies which they assign to various consumers asking for credit. Banks than through their internal as well external credit scores or ratings decide to whom they should provide the credit. These criteria of credit rating often are designed to be tough since Banks in order to avoid defaults, tighten their criteria to extend the credit to these customers. However, due to increasing needs of those customers, whose credit history or their credit ratings do not fall under the criteria laid down by the banks, banks try to accommodate them also. Sub-prime lending is the part of that phenomenon.
A subprime lender provides loans at higher interest with inappropriate incentives to high risk borrower. Ideally a subprime lender is one who lends to the borrowers who do not qualify for the loans from mainstream lenders. This is because of the fact that those borrowers who have a bad credit history. A subprime lender is mainly an independent entity or the sub-entity of the main players in the markets. However the only way to identify the lenders who lend to the subprime borrowers is to judge from their prices as they are normally higher than the prices charged by the normal lenders with standardized terms and conditions in the market. A subprime lender generally lend following types of loans:
i) Interest Only Loans are the loans which give borrower an option to pay interest on their loans only; thereby Principal remain unchanged and at the end of loan term payments increase substantially. Traditionally these loans are cheaper in nature as the normal mortgage loans require some portion of principal and mark-up to be paid in the monthly installment of the mortgage. These loans became popular mainly due to the fact that they required lower loan payments therefore buyers can afford the larger homes as