Subprime Loans Have Higher Interest Rates Than Conventional Loans

question 87

Short Answer

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

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Definitions:

Sales Budget

An estimate of the expected total sales revenue and selling expenses of a company for a specific period, helping to plan financial activities.

Budgeted Volume

The predicted amount of work, sales, or production a company plans to achieve within a certain period, usually used for planning and performance evaluation.

Expected Sales

Projected revenue that a company anticipates earning from the sale of goods or services in a future period.

Ending Inventory

The total value of goods available for sale at the end of an accounting period.