Subprime Loans Have Higher Interest Rates Than Conventional Loans

question 209

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 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. The statements above most strongly suggest that if all subprime loan borrowers had taken out the loan that was most appropriate for their needs, then what would have been the outcome?

• A) None of them would have taken out an adjustable loan.
• B) None of them would have taken out a subprime loan.
• C) Most of them would have paid less in interest.
• D) Most of them would have taken out a conventional loan to cover any expenses not covered by a subprime loan.
• E) Most of them would have paid money at the start of the loan in order to get a reduced interest rate over the life of the loan.

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Definitions:

Female-headed Families

Households led by women, often highlighted in discussions on poverty, social policy, and income support due to unique socioeconomic challenges.

Social Insurance

programs designed to provide financial protection against certain life risks (e.g., old age, disability, unemployment) funded by contributions from employers, employees, or both.

Social Security

A government program that provides financial assistance to people with little or no income, mostly the elderly or disabled.

Food Stamp Program

A government assistance program that provides low-income individuals and families with funds to purchase groceries, aiming to reduce hunger and improve nutrition.