Subprime lending refers to the practice of providing loans to borrowers who have a higher risk of defaulting on their payments, usually due to a poor credit history or low credit scores. These borrowers are considered "subprime" because they don't meet the traditional lending standards set for borrowers with good credit. To compensate for the higher risk associated with subprime lending, lenders typically charge higher [[interest rates]] and fees to these borrowers. The rationale is that the increased revenue from the higher rates will offset the potential losses from defaults. ## 2008-9 financial crisis Subprime lending can include various types of loans, such as mortgages, auto loans, and personal loans. Subprime mortgages, in particular, gained notoriety during the 2008 financial crisis. In the years leading up to the crisis during the [[Great Recession Timeline]], there was a significant increase in subprime mortgage lending, fueled by low interest rates and high demand for housing. Many subprime borrowers took on adjustable-rate mortgages (ARMs) with low initial "teaser" rates that later reset to much higher rates, making monthly payments unaffordable for many borrowers. When the housing market began to decline, and home prices fell, many subprime borrowers found themselves with negative [[equity]] in their homes (owing more on their mortgages than their homes were worth). This situation led to a wave of mortgage defaults and foreclosures, which contributed to the collapse of the housing market and the global financial crisis. Subprime lending can have a place in the financial market, as it provides access to credit for those who may not qualify for traditional loans. However, it's essential to strike a balance between making credit accessible and ensuring responsible lending practices to avoid the systemic risks associated with excessive subprime lending.