What does the term ‘subprime lending’ refer to?

The term ‘subprime lending’ specifically refers to loans that are extended to borrowers who have poor credit histories. These individuals typically present a higher risk to lenders because of their previous financial behavior, which may include missed payments or high levels of existing debt. As a result, lenders often charge higher interest rates on these loans to compensate for the increased risk of default. This practice allows individuals with lower credit scores to access credit, though it comes with the significant downside of higher borrowing costs.

The other definitions offered do not describe subprime lending accurately; for example, loans for borrowers with excellent credit and government-backed loans for veterans represent entirely different lending categories that do not involve the elevated risk associated with subprime borrowers.