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Prime, subprime and predatory lending

The marketplace for home loans, both mortgages and home equity loans, has different categories of loans based on the applicant's credit history. The two main groups are called prime and subprime loans.

Prime loans are the loans given at the lowest interest rates and costs to the consumer, and are generally given to consumers who present the lowest risk of default to the lender. These consumers generally have the best credit history and credit rating.

Subprime loans are more expensive loans given to consumers with flaws in their credit history or sometimes, no credit history. If your financial history shows other loans or financial obligations that you have not repaid, you may need to pay more (either in interest, fees, or both) in order to borrow money.

While more expensive, subprime loans provide access to credit for consumers that do not qualify for prime loans.

Predatory lending is a set of lending practices that takes unfair advantage of consumers. Consumers end up taking out loans that they cannot afford, have deceptive or unclear terms in them, or which cost more than necessary and may ultimately lead to the loss of one's home. Most predatory loans occur in the subprime market, but not all subprime lending is predatory.

Consumers need to beware of predatory lending practices when searching for a loan. Predatory practices target both home buyers (20% of predatory loans) and homeowners taking out second mortgages or home equity loans (80% of predatory loans). Many of the homeowners may be looking for home equity loans to get money for home improvements, personal or medical expenses, or to consolidate debts.