What is "subprime lending"?

Subprime lending refers to the practice of providing loans to borrowers who have lower credit ratings, often due to past credit issues, lack of credit history, or other financial challenges. These borrowers are considered higher risk compared to those with good or excellent credit. Because they present an increased risk of default, lenders typically charge higher interest rates to compensate for this risk. This practice provides access to credit for individuals who might otherwise struggle to obtain loans, but it also involves significant potential costs for the borrower related to higher rates and fees.

The other options describe different types of lending practices. Lending to first-time homebuyers with no credit history typically falls under more conventional lending structures that may include programs aimed at assisting such buyers, rather than subprime lending. Lending to borrowers with excellent credit ratings is characterized by lower interest rates and more favorable terms to responsible borrowers. Lending that requires no documentation, often referred to as "no-doc" loans, also represents a separate category that is not necessarily linked to subprime lending but can apply to various types of borrowers regardless of credit rating.