Subprime Lending

Subprime Lending

Introduction

Subprime lending is a term used in finance to signify the act of giving a loan to an individual where you are not sure whether the individual has the capacity to repay the loan or not. In fact the highest chance is that the individual will not be able to repay the loan since their characteristics disqualify them from the loan. Subprime lending is one of the most risky risks that financial institutions are taking nowadays. Many citizens on the other hand are rushing to acquiring these loans not knowing how they will repay the loan. It has a negative effect to both the borrower and the lender of the cash. This paper will seek to analyse the consequences of subprime lending to a countries economy and to the buyer market.

Consequences of Subprime Lending to the Economy

Research that has been done in the United States has shown that giving loans to homeowners and buyers who do not qualify for the loans has become a very common issue in the United States. This is greatly and negatively affecting the economy of the United States as a whole. Many people have rushed to take the loans and the financial institutions have gone ahead to give them the loans knowing very well that these individuals cannot pay the loans. If the individual is incapable of paying the loan, there is nothing that the institution can do to the individual since they gave the loan to the individual knowing that he or she cannot repay that loan. This affects the economy in a very negative way and the economy now becomes a burden not only to the government but also to the citizens in the state. Again, research done in the United States have shown that financial institutions that offer subprime lending lose about a third of their value due to losses by customers who fail to repay. Subprime lending is also affecting the largest financial intuitions which directly affect the economy of a state. This means that their subprime lending affects the economy of every individual who resides in the country (Chris, 2009: p.1).

Subprime Lending

Consequences of Subprime Lending to the buyers Market

A buyers market is one where buyers are less than the sellers and therefore the buyers have a choice to make on which seller to purchase his or her products. Unfortunately, buyers who are receiving subprime lending are going for such large amounts that they can’t afford to repay or will land them in trouble. The institutions that are not offering the subprime loan are on the other hand lacking customers who can support their operations (Chris, 2009: p.1). This is leading to more and more harm to the buyers market because many buyers are proceeding to receive the loans that they will have trouble in repaying and therefore the financial institutions will end up being bankrupt to the extent of being unable to offer the service in the future.

Foreclosures

Foreclosures are as associated with the failure of a homeowner to pay the principle amount that he or she has promised to a financial institution. This forces the institution to take the property and sell it to another person at a lower price probably by auctioning. Subprime lending is causing disclosures in countries like the United States everyday. Many individuals who go for the loans are unable to repay it and they end up being left homeless when the institutions take their property (Chris, 2009: p.1).

Weakening the Property Value

One of the negative effects of subprime lending is that it makes the value of the property to go down. This happens in that the institution can take the property and sell it at slower price, or the owner may sell the property at a lower price so as to pay to the financial institution what he or she owes it (Chris, 2009: p.1).

Conclusion

Subprime Lending

Subprime lending to a certain extent is quite dangerous both to the economy of a country and to the buyer market. This is because the individuals who receive these loans do not have the capacity to repay the loan and therefore the lenders will end up failing to receive the payment. This forces the financial institutions or the owners to sell the product at a throw away price so as to recover their dues. Subprime lending also causes the property to lose its value and be sold at a price that it doesn’t deserve. Subprime lending should be avoided for the growth of the economy and the betterment of the buyers market.

Reference

Chris, I. (2009). How the Subprime Boom Hurt Everybody. Retrieved on 12-Oct-09 from http:// www.wisebread.com/how-the-subprime-lending-boom-hurt-everybody