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Sub-prime Credit

Not all consumers have perfect credit. Emergencies, job-loss or simple mistakes have damaged many consumers’ credit scores. Traditionally, these individuals would have been locked out of the credit markets for years, while they slowly rebuilt their credit record.

In recent years, however, financial institutions have developed products to extend credit to these consumers. Credit scores are often ‘backward-looking’, i.e. they reflect a consumer’s past behavior and are not necessarily good reflections of a consumers’ current financial situation. Sub-prime loans allow these consumers to access credit while they are repairing their credit score.

Of course, some small number of these consumers hasn’t yet learned to responsibly manage credit. Some of these will default on the loans. Because of this, financial institutions charge a higher rate of interest. They aren’t taking advantage of consumers. They are providing a service to consumers.

As sub-prime borrowers stay current on their loan payments, their interest rates tend to decline over time.