The subprime crisis

What is a subprime?

Literally, it means a high risk loan. These are variable rate loans granted to individuals who wouldn’t normally be eligible due to their income. Considering the risk, the rate is higher than for a traditional loan.

A few years ago, American banks got involved in this promising market.

Thousands of low-income Americans, thrilled at the prospect of being able to buy a house, signed up for a subprime. Unfortunately, the real estate bubble burst in 2006 and the cost of acquiring these properties plummeted. Many households found themselves owners of a home worth less than what they paid for it. And because interest rates rose at the same time, borrowers saw the cost of their credit skyrocket and could not make their loan repayments.

The seizure of thousands of homes by banks resulted in several lending institutions filing for bankruptcy.

The bank and insurance sectors which had invested in subprimes were hard hit.
According to some experts, this crisis could bring about a stock market crash similar to that of 1929.