More lenders are jumping into the subprime loan market again, ready to give borrowers with flawed credit another shot at the housing market.
“As the economic recovery continues, new entrants see an opportunity to lend at interest rates approaching 10 percent and sometimes much more,” The Wall Street Journal reports.
Firms such as Lending Club, Springleaf Holdings Inc., and FreedomPlus are among such lenders that have joined the arena, but they prefer a different term than “subprime,” which conjures up days of the housing crisis when many subprime borrowers defaulted on loans. Instead, FreedomPlus says it calls the market “emerging prime,” and Lending Club prefers the term “near prime.”
FreedomPlus is reportedly targeting about 80 million people with credit scores between 600 and 700 and offering loans up to $35,000 that must be repaid over two to five years. The average rate it’s charging customers is 18 to 20 percent.
"The recession knocked a lot of people to their knees," says FreedomPlus President Joseph Toms. "Now, they're in a better position and nobody is willing to lend to them."
But some banks are hesitant to jump back into the market due to new mortgage regulations and risk to their reputation, says Amy Crews Cutts, chief economist at Equifax.
"You have to be alert to the trade-off between serving consumers and being viewed as taking advantage of them," she says.