Which of the following is not typically associated with a subprime loan?

• A. Limited Documentation
• B. High pre-payment penalties
• C. Balloon payments
• D. Based on LIBOR

Answer: (D)

Subprime loans are designed for borrowers with weaker credit, so they often come with features that offset higher risk: documentation is commonly limited, fees and interest can be higher, prepayment penalties are used to protect the lender, and balloon payments are a way to offer lower initial payments while ensuring a payoff later. The benchmark used to price these loans is typically a consumer-focused index or a margin over a base rate that’s common in retail lending, not a interbank benchmark. LIBOR, on the other hand, is a rate from the interbank market and is more characteristic of larger, prime or corporate-style financing, not typical for consumer subprime mortgages. So being indexed to LIBOR isn’t a standard feature of subprime lending, making it the best choice among the options.