What does "subprime lending" refer to?

Subprime lending refers to the practice of lending to borrowers who have lower credit scores or limited credit histories, making them higher risk compared to prime borrowers. These individuals may have previous issues with credit, such as delinquencies or defaults, which makes traditional lenders hesitant to provide loans to them. Consequently, subprime lenders address this demand by offering loans with higher interest rates to compensate for the increased risk associated with lending to these borrowers. This type of lending plays a significant role in the broader financial system, as it provides opportunities for individuals who might otherwise be unable to secure credit.

The other options do not accurately capture the essence of subprime lending. Lending to high-credit borrowers reflects prime lending, which involves lower risk and often results in better terms for the borrower. Lending for business purposes pertains to commercial loans, which are distinctly different from personal loans associated with subprime lending. Lending with no interest rates is not a usual practice in any legitimate lending scenario, as it does not align with standard financial principles. Thus, subprime lending is specifically characterized by targeting borrowers with lower credit scores.