In the US, they are known as "bad credit mortgages". Here, sub-prime loans are not quite so common that they have earned a nickname. However since the credit crunch of summer 2007, the phrase "sub-prime" has become commonplace, after "bad credit" borrowers in America began defaulting on their repayments, putting US banks' balance sheets in jeopardy and sparking a global squeeze on lending.

What is a sub-prime loan?

Generally speaking, anything sub-prime is aimed at borrowers with patchy credit histories. The definition has become more complicated over recent years. Sub-prime no longer just means "bad credit", it can also apply to borrowers who have missed just a few credit card or loan repayments, depending on the lender's own criteria.

The term typically refers only to mortgage candidates, although technically, any form of credit offered to people who have had problems with debt repayment in the past is "sub-prime".

Rates on sub-prime deals are typically higher to reflect the extra risk involved in lending to people who have struggled before.

Sub-prime mortgages in the US are not the same as those in the UK. In the US, a sub-prime mortgage starts off on a very low rate for a year or two, before switching suddenly to a very high rate, meaning a massive jump in repayments.

In the UK, a sub-prime borrower will start off on a relatively high rate of interest. However, there are many different kinds of sub-prime, depending on the extent of the borrower's past problems.

Extra light, light, medium, heavy, or very heavy adverse

These are the categories that mortgage lenders divide sub-prime borrowers into. Even these are subject to some variation.

If you are prime, it means you have a clean credit record. Lenders used to allow minor debts on prime deals, but Moneyfacts says that this is no longer the case.

Light or near-prime essentially means that you have been a few months in arrears on some debt repayments a couple of times in the past. Borrowers with no more than 2 County Court Judgments (CCJs), worth up to a maximum of £3,000.

Medium adverse, says Moneyfacts, is defined as up to three CCJs to a maximum value of £5,000.

Explore Money

• Property & Mortgages

• Savings

• Borrowing

• Investment

• Funds

• Insurance

• Consumer Affairs

• Tax

• Pensions

• Broadband