NPR on Subprime Lending: It’s A Vicious Cycle

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.

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  1. Rock says:

    These sub prime loans were pushed for so long that the general public needs to be unbrainwashed.

    It seems that as expected the companies that are lending money to people with histories of not being able to meet the payments are being to fold. People are defaulting. I don’t think it took a genius to see that one coming.

    In general stick with your conventional fixed rate 15 or 30 year.

  2. TiP says:

    Can’t say it any better than Peter Schiff:

    Even when reporting on the subprime mess and the move to raise lending standards, most in the media still get it wrong. They seem to think the emerging “credit crunch” is a problem for home buyers as it makes qualifying for a mortgage that much more difficult. But, by preventing buyers from overpaying for homes, the credit crunch is actually a blessing in disguise. Tighter lending standards will help precipitate a crash in real estate prices. What could be better for potential home buyers than cheap houses? Sure they might have to wait a few more years until they can actually save enough money for a down payment, but since the purchase prices will be so much lower, those down payments will be easier to accumulate. More importantly, since they will be borrowing so much less money, the total cost of buying will be reduced even more substantially.

  3. augustine ruiz says:

    I am looking for the program on subprime loans where there was a funny characterization on buying a doll house. Can anyone find that for me?


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