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February 21, 2023 at 5:25 am #12769thomasbrough451Guest
What Is an NINJA Loan?
How does a NINJA loan works
The risk of loaning NINJA
NINJA Loans and the Financial Crisis
The Bottom Line
Personal Finance Lending
NINJA Loan: Definition, History, Current Loan Availability
By Julia Kagan
Updated August 11, 2022
Review by Julius Mansa
What is an NINJA Loan?
The term “NINJA loan” refers to a NINJA loan is a slang term for an unrequited loan extended to a borrower who has made little or no effort by the lender to confirm the ability of the borrower to repay. It means “no income or job as well as no asset.” Whereas most lenders require loan applicants to present proof that they have a steady flow of income or sufficient collateral but a NINJA loan doesn’t require that verification procedure.
NINJA loans had been more common prior to the 2008 financial crisis. In the aftermath of the financial crisis, the U.S. government issued new rules to improve lending practices in the credit market. These regulations included tightening requirements for granting loans. As of now, NINJA loans are rare, if not gone.
An NINJA (no income or job as well as no asset) loan is a term used to describe a loan given to a borrower who may not be able to pay back the loan.
A NINJA loan is granted without verification of the borrower’s assets.
NINJA loans were mostly gone after they were largely eliminated after the U.S. government issued new regulations to improve standard lending practices following the financial crisis of 2008.
Certain NINJA loans have attractively low interest rates which rise with time.
They were popular because they could be obtained quickly and without the borrower needing to present documents.
How does a NINJA loan works
Financial institutions that offer NINJA loans make their decisions based on the credit score of the borrower without a verification of assets or income such like income tax returns, pay stubs, or bank and brokerage statements. The borrower must have a credit score of at least a certain level to be eligible. Since NINJA loans are usually offered through subprime lenders, however their credit score requirements might be less than the requirements of mainstream lenders, including major banks.
NINJA loans are structured with varying terms. Some may offer an attractively low interest rate at first, which will increase over time. In order to repay the loan, the borrower must pay the debt within the timeframe they have set. Failing to make those payments could lead the lender to pursue legal action to collect the debt, resulting in a drop in credit scores of the borrower and their ability to qualify for other loans in the future.
Risks associated with NINJA Loans
Because NINJA loans require such minimal paperwork compared, for example, with traditional home mortgages or business loans the application can be processed quickly. Their quick processing makes them appealing to some customers, especially those who don’t have the usual documentation or don’t wish to produce it.
The loans could, however, be very risky for both the lender as well as the borrower. Because NINJA loans require no evidence of collateral, they cannot be secured by any assets the lender can seize in the event that the borrower defaults on the loan.
NINJA loans can be risky for the borrower in a way that is not restricted by the traditional conservative bank underwriting practices that often protect both parties from danger. It is possible that borrowers will be enticed by the prospect of being able take out larger loans than they could reasonably anticipate repaying, particularly if they focus on a low interest rate that is likely to increase in the near future.
NINJA loans are extremely dangerous for both lenders and borrowers alike.
NINJA Loans and the Financial Crisis
After a large number of loan defaults led to the financial meltdown of 2008 and the crash in real estate values across the country, the federal government imposed stricter rules on lenders and made loans more tightly controlled than they had been before and mortgage loans having the most impact.1
The legislation of 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act introduced new guidelines for lending in addition to loan applications. The new rules largely did eliminate NINJA loans which required lenders to obtain more comprehensive details about potential borrowers and their credit scores and documented proof of employment as well as other income sources.
The amplification of NINJA loans was a key factor in both the 2007-2008 Financial Crisis and housing bubble. A research paper estimates that such loans contributed to $100 billion, which is 20% of the total losses, as reported during the crisis.2
Do NINJA Loans Still Available?
NINJA loans have mostly ceased from being available within the United States due to tighter lending guidelines that were enacted in the aftermath of the financial crisis of 2008-09.
Why Did Banks Provide NINJA Loans?
Prior to the financial crisis, banks became greedy in profiting from writing home loans. NINJA loans were initially designed to help borrowers who were having difficulty in obtaining the necessary documents to prove their earnings and assets, like previous tax returns as they derived their income from non-traditional sources, where documentation is unavailable for example, tips or a personal business. These lenders typically extend loans to borrowers based purely on their credit scores, without any further documentation of their capacity to pay.
What Are Other Terms to use with NINJA Loans?
NINJA loans (no source of income, no job, not having assets) are a category of low/no documentation (low/no doc) loan, also known as “liar loans.”
The Bottom Line
In the early into the mid 2000s NINJA loans (which did not require no documentation to prove an income, job, or assets) contributed to the rise in the housing market and its subsequent collapse , which coincided with the financial crisis of 2008-09 and the ensuing Great Recession. Since then new regulations have eliminated this type of lending.
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