A loan extended to a borrower with little or no attempt by the lender to verify the applicant's ability to repay
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A NINJA Loan (No Income, No Job, and No Assets Loan) is a term used to describe a loan that’s been extended to a borrower with little or no attempt by the lender to verify certain attributes that predict the applicant’s ability to repay. It is contrary to most conventional loans, which require applicants to provide substantial proof that they earn sufficient income or possess adequate collateral to qualify for the loan.
NINJA loans were a contributing factor to the 2008 Global Financial Crisis – namely, the collapse of the housing market. The US government’s since issued new regulations to improve the standard of lending across the credit market.
How Does a NINJA Loan Work?
Conventional loans require the lending institution to do extensive due diligence on a potential borrower to assess their ability to repay the loan. However, it is an intense and lengthy process, so many institutions began to find new ways to “more quickly” offer such loans – one of which was the NINJA loan framework.
1. Must meet a credit score threshold
Under the NINJA loan framework, the lending institution would offer the loan based on the borrower’s credit score with no additional verification for items such as assets or income.
In other words, if you met the credit score threshold, you were able to acquire a NINJA loan. Most of the loans were offered through subprime lenders, which often put a downwards pressure on the credit score threshold.
2. Initial terms
NINJA loans usually included an introduction or “teaser” rate to make the loan appear more attractive. However, over time, the interest rate on NINJA loans increased to reflect the risk being taken on by the lender.
3. Loan repayment
NINJA loans, like conventional loans, were required to be repaid within a set timeframe that was agreed upon by both the lender and the borrower. Failure to make an interest payment and repay the loan (i.e., defaulting) can cause lending institutions to take legal action to collect on the debt, resulting in a drop in the borrower’s credit score. It affects an individual’s ability to receive a future loan and, often, seized assets.
Advantages of NINJA Loans
As with any financial instrument, NINJA loans offer the following advantages:
1. No paperwork, no problem
Because NINJA loans only required verification of a credit score, they were easy to process compared to traditional loan applications. The loan process was quick, which was appealing to some borrowers, specifically those who did not possess customary loan documentation or did not want to create it.
2. Provided credit access to those who would not conventionally qualify
NINJA loans granted credit to those that a traditional bank would usually not extend a loan to. As a result, the individuals could purchase assets, such as homes and cars, that were essential to living.
Disadvantages of NINJA Loans
NINJA loans also come with several disadvantages, such as:
1. Increased risk
NINJA loans carried an increased risk for both borrowers and lenders. On the lender side, the loans required no evidence of collateral, which essentially made them unsecured loans. It meant that in the event of a default, the lender could not seize any assets to cover their losses.
From the borrower’s perspective, individuals oftentimes took out loans that were greater than what they would receive from a traditional bank. As a result, the borrower would often borrow above their means to settle the loan.
2. Easy to cheat
Due to the lack of a standardized process, NINJA loans offered a quick way to provide loans to borrowers as opposed to following traditional methods. It created immense problems in the credit market and caused the eventual collapse of the global economy during the financial crisis.
NINJA Loans During the 2008 Global Financial Crisis
NINJA loans, which were usually a part of the subprime mortgage market, created a burden on the credit markets before the financial crisis. When the subprime loans were underwritten, they were then sold to the “Big Banks” and put into an asset-backed security that formed a portion of a collateralized debt obligation (CDO).
When mortgage delinquency rates increased in 2007, the value of the underlying asset (the mortgages) decreased. Before it happened, the US Congress passed the 2007 Bankruptcy Bill, which made it possible for insolvent individuals to go bankrupt without recourse. As more individuals found themselves unable to pay their mortgages, they simply stopped paying. It led to a chain reaction that collapsed several markets and economies.
In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act created a more stringent standard for lending and loan applications. The new regulations required lending institutions to obtain more comprehensive information from a borrower, including credit scores and employment documents, before extending the loan.
As such, NINJA loans are extraordinarily rare, if not extinct, today.
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