What is the subprime effect?

Subprime lending, also called ‘BPaper’, ‘near-prime’ or ‘second chance’ lending, refers to the practice of giving loans at interest rates above the prevailing market rates because of their low credit status and increased risk due to either a limited credit history, or histories of payment delinquencies, chargeoffs or bankruptcies. Subprime lending includes mortgages, credit cards and car loans. It is risky for both the lender and the borrower. It helps consumers who otherwise would not have access to credit market. But on the flip side the borrowers don’t have the resources to meet the long-term loan obligations. A crisis began in 2006, when in the US, thousands of borrowers defaulted and many lenders had to file for bankruptcy leading to a direct impact on the US housing market and economy as a whole.