What is a primary risk associated with sub-prime lending?

In the context of sub-prime lending, the primary risk associated is indeed higher interest rates. Sub-prime lending refers to the practice of offering loans to borrowers who have lower credit ratings, which typically reflects a higher risk of default. Because lenders perceive these borrowers as less likely to repay their loans, they offset this risk by charging higher interest rates compared to those charged to borrowers with more robust credit histories.

Higher interest rates serve to compensate lenders for the increased risk they are taking on when lending to sub-prime borrowers. This can place a significant financial burden on these borrowers, leading to difficulties in repayment, which can result in default and foreclosure. This cycle can exacerbate the financial instability of individuals with lower credit ratings, making it a critical issue within the housing and lending markets.

Other options, while related to the broader lending environment, do not encapsulate the primary risk inherent in sub-prime lending. Low interest rates typically apply to prime borrowers and do not reflect the reality of sub-prime lending; guaranteed loan approval can misleadingly imply a safety net when, in fact, it can contribute to deeper indebtedness under higher rates; and lower credit ratings indicate the borrowers' financial situation but do not as directly define the associated risk of lending practices like