Subprime Loans Have Higher Interest Rates Than Conventional Loans

question 192

Multiple Choice

Subprime loans have higher interest rates than conventional loans.Subprime loans are designed for borrowers with low credit scores who would not qualify for conventional loans.The borrower pays a higher rate to compensate the lender for the greater risk of a default.Subprime loans typically have adjustable rates,meaning that the interest rate can change over the life of the loan.Borrowers who take out adjustable subprime loans usually try to keep the rate as low as possible at the start of the loan,even when doing so would lead to higher payments over the entire life of the loan.After many people defaulted on their subprime loans,research revealed that the majority of people who took out subprime loans could have qualified for conventional loans. Taking out a subprime loan to buy a house is most likely to be a reasonable financial decision when which of the following is true?

• A)Qualifying for a conventional loan is impossible.
• B)Owning a home is an important life goal for the borrower.
• C)Adjustable rates are likely to be higher than fixed rates.
• D)The borrower reasonably expects to have greater financial means in the near future.
• E)The previous owner of the house took out a subprime loan.

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