Why do subprime loans often have stricter terms than prime loans?

Subprime loans have stricter terms primarily to compensate for a higher risk of default associated with borrowers who typically qualify for these loans. Borrowers who are categorized as subprime often have lower credit scores or a more limited credit history, which makes them more vulnerable to missed payments or defaults. Lenders respond to this increased risk by imposing tighter terms, such as higher interest rates, larger down payments, or more stringent repayment terms. These adjustments help mitigate the risks that lenders face by lending to borrowers with poorer credit profiles.

Other options do not accurately reflect the fundamental reason for the stricter terms in subprime lending. While borrower demographics may play a role in determining creditworthiness, they do not directly justify the terms themselves. Government-backing usually applies to prime loans or specific programs aimed at aiding lower-income borrowers, not subprime loans. Finally, while promoting rapid repayment might seem beneficial, it is not a core reason for the stricter terms placed on subprime loans compared to prime loans. Thus, the correct answer centers on the need for lenders to protect themselves against higher risks in subprime lending scenarios.