What is a subprime loan?

Subprime loans are loans with less favorable terms than that of a prime loan. The terms are usually less favorable because the person in question has either poor credit or does not have the necessary income to support or warrant the extension of credit. There are risks involved for the lenders, and for the borrowers. Lenders run the risk of never getting their money back or having it take a long time to see any return on their investment. So in order to absorb some of the risk there are stipulations often added to help insure the lender will get their money back. This often includes adjustable interest and ballooning payments (Smith, & Hevener, 2014) for the life of the loan.  Many of the borrowers of subprime loans tend to be African Americans. Many African Americans are served in their loans by agents that specialize in higher rate loans regardless of their total income (Beeman, Glasberg, & Casey, 2011), this speaks to the other issues of subprime loans and predatory lending that cause us to question the leadership in institutions and the ethics involved in the decision making process. However this is not just because African Americans are less likely than their white counterparts to receive home loans from any sources, because they are more likely to accept subprime loans and therefore are more likely to be victims of predatory lending (Lacy, 2012).  This begs the question of why subprime loans are pushed more towards minorities. It seems to me that the only way to grow the amount of home owners is to either allow those who can’t qualify for prime rate loans to work towards a prime rate loan, or create a separate type of loan that would provide a pathway for those who might never get to a place financially that would allow them to take advantage of a prime rate loan. However in the creation of these types of loans there should be added safety policies that protect the borrowers from those who would harm them and seek to make money off of their circumstances outside of the additional assessment of interest or payment obligations. This would assist leadership in making ethical decisions about what a borrower can afford and how they can still make money off of the transaction.