Subprime lending played the leading role in the 2008 financial crisis. Some say that it is only a matter of time until it happens again. History is destined to repeat itself, so what can we learn?
Subprime borrowers and lenders are largely credited with causing the 2008 financial crisis. This financial crisis of 2008 had an enormous impact on the United States and consumers. It caused many banks to go under, companies to go bankrupt, and played a huge part in the rise of unemployment. So, what is subprime lending and how did it get us to a crisis point?
What is Subprime Lending?
Subprime loans are designed for consumers who do not qualify for conventional loans due to low credit scores, low income, or any other number of negative attributes.
Ways to avoid subprime lending include: managing your credit, looking at your debt-to-income ratio, trying new lenders, and considering a co-signer.
Below are some specific ways to avoid subprime lending:
- Managing your credit can be as simple as checking your credit reports regularly (for free!).
- Looking at your income will make sure you are covering your minimum monthly payments in a timely manner.
- Be sure to research before you give your personal information out to just anyone.
- Asking someone to co-sign for you can be uncomfortable, so make sure you come prepared with a solid plan!
Collapses from subprime lending began happening at least 18 months prior to the 2008 financial crisis. So, how did it happen? Why wasn’t it prevented?
How did Subprime Lending influence the 2008 Financial Crisis?
Banks began overselling mortgages to feed the market’s demand. Many homeowners began buying homes that they could not afford, and started paying with loans. However, due to their low income and financial setbacks, it was impossible to pay back all the money they had been borrowing. Today, market perception lags are still common. We need to be wise in how we are handling our money to make sure it is spent responsibly in order to help avoid any future crisis.
Will another crisis occur?
Former Treasury Secretary, Tim Geithner, believes that another financial crisis is bound to happen at some point, but the structured reforms that have been taken since the 2008 crisis can help minimize the damage. In order to avoid similar financial crises, we need to take the necessary steps to avoid subprime lending and be responsible with how we are spending (& lending) money.
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