Subprime Lending Explained: Teaser Rates, D-Paper and UK Loan Sharks

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Subprime, also called near prime, non prime or second chance lending, is a lender's price for a higher statistical chance of default: steeper rates, weaker collateral and harsher terms. The label can attach to the product rather than the person, so a borrower with a perfect score taking an interest only or low documentation loan can still pay the subprime premium, and an 18 year old with no history looks as risky as someone drowning in debt. Princeton economist Harvey S. Rosen argued that letting in the excluded was the great achievement of mortgage innovation; critics see a costly trap.

Before 2008, U.S. lenders graded borrowers from A paper down through Alt-A to D paper, with subprime typically meaning a FICO score below 600, and by March 2007 there were $1.3 trillion in subprime mortgages across more than 7.5 million first lien loans. The originate to distribute model let lenders sell loans on to Wall Street, which bundled them into securities rated as safe. U.S. student debt passed credit card debt at $1 trillion in 2012 and reached $1.5 trillion by 2018. In the UK, the Financial Conduct Authority capped short term credit at 0.8 percent a day from January 2015 and limited total repayment to double the amount borrowed.

• On a $500,000 loan, a teaser rate of 5.5 percent meant about $2,839 a month; resetting to 8.5 percent pushed it past $4,079.
• Over 30 years that reset raises the lifetime cost from about $1.01 million to over $1.36 million.
• Canada largely avoided the subprime mortgage boom through tighter lending standards.
• Between 2019 and 2024 the UK high cost credit sector shrank by almost £3 billion as Wonga, BrightHouse, Amigo and Provident's doorstep arm exited.
• A 2024 ClearScore and EY report estimated three million UK adults had used an illegal lender in the previous three years, a tenfold rise.