Part 1
The Subprime Meltdown
Introduction
Recently, there has been a sharp rise in subprime loaning in the US, which is causing an upset in the US financial market and as a result affecting all the other sectors of business in the US economy as well. Moreover it has caused hiccups in international financial markets as well.
In the first half of the report we will take a look at what subprime loans are and how they originate, then we go on to see how it is affecting the financial market of the US and how it spread to the other sectors and affected them simultaneously. Finally we discuss the possible steps to be taken to get the situation into control.
In the second half, we see how this crisis affects other countries and how they can buffer themselves from any lasting harm.
What Are Subprime Loans?
Subprime loans or Second Chance Loans are given to borrowers who have a negative credit history and cannot qualify for the current market interest rates. Subprime loans a usually risky for both the lender and the borrower. The lender is at risk because the borrowers have lower incomes and poor record for paying debts, increasing the risk of bad debts for the lender. The borrowers are at risk because the lenders would charge a higher rate of interest on the loans to secure their financial safety. In discussing this, Aaron NematNejad states “The high interest rates however are strenuous for borrowers which further increases their likelihood of default.” This means that whatever the interest rate, the borrowers are at a higher risk of causing bad debts to the lenders.
Subprime loans were created with the realization that a lot of money could be made to borrowers with poor credit who could not get conventional loans. Conventional lenders would not take th ...