I’ve been wanting to highlight a story I heard on NPR for almost a week now, but it’s been difficult to summarize my feelings on it. I heard The Other Subprime on the program Marketplace, which airs on my local National Public Radio station almost a week ago, and it nearly knocked the wind out of me.
For starters, a subprime loan is a loan offered to someone with relatively poor credit. This loan usually has a very high interest rate to “compensate” for the poor credit of the borrower. Subprime loans include everything from unusually structured home loans all the way down to payday loans.
As I’ve discussed in the past, such loans themselves are a poor deal because you have to pay back such a tremendous interest rate. This NPR story, however, set me on edge when it included the following quote, which opens up a danger that I hadn’t previously considered:
If the high-priced loan becomes a problem or if payments are late, which happens more these days, the borrower’s credit rating suffers. That makes their next loan more likely to be subprime. And on it goes.
Subprime loans are a vicious cycle, period. If you get one and then find that making the payments on that loan are difficult, you’re suddenly in a situation where your credit is damaged even more, and thus the only type of loan you can get is a subprime loan.
What can you do if you’re stuck in this mess? There’s really only one way out, and it’s a road that’s very rough for people who are convinced that they need consumer goods. Stop buying. Later today, I’m going to post a very lengthy plan that I’ve prescribed to someone stuck in this very situation, but it’s important to consider right now that subprime loans are a very vicious cycle once you’re caught in their grasp.