What is a key disadvantage of subprime lending?

A key disadvantage of subprime lending is the presence of higher interest rates and risks associated with these loans. Subprime loans are typically extended to borrowers with low credit scores or limited credit histories, which make them more likely to default on their repayments. In response to this increased risk, lenders charge higher interest rates to compensate for potential losses.

Additionally, subprime loans often come with unfavorable terms that may include adjustable-rate mortgages, prepayment penalties, and other fee structures that can put borrowers in a financially precarious situation. This combination of high-interest rates and the risk of borrower default makes subprime lending a disadvantageous option for consumers.

Moreover, while lower loan limits and availability issues might impact some borrowers, they do not encapsulate the core issues that make subprime loans particularly risky. The more favorable repayment terms would generally contradict the typical characteristics of subprime loans, which are designed to mitigate risk for the lender rather than providing advantageous terms for the borrower.