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What Is a NINJA Loan?
What is a NINJA Loan Functions
Risks of NINJA Loans
NINJA Loans and the Financial Crisis
FAQs
The Bottom Line
Personal Finance Loans
NINJA Loan: The definition, the history, and the current Loan Availability
By Julia Kagan
Updated August 11 2022
Review by Julius Mansa
What is an NINJA Loan?
An NINJA loan is an informal term used to describe an unrequited loan extended to a borrower who has made little or no attempt by the lender to confirm the borrower’s capacity to pay. It means “no income not working, no income, and no assets.” While most lenders require loan applicants to present proof that they have a steady flow of income or sufficient collateral but the NINJA loan does not require verification process.
NINJA loans were more frequent in the years prior to 2008’s financial turmoil. After the financial crisis it was announced that the U.S. government issued new regulations to improve standard lending practices in the credit market. These regulations included tightening the requirements for the granting of loans. In the present, NINJA loans are rare and, in some cases, out of existence.
Important Takeaways
The term NINJA (no income (no job, no income, as well as no asset) loan is a term that refers to the loan given to a borrower who may not be able to repay the loan.
A NINJA loan is extended without verification of the borrower’s assets.
NINJA loans largely disappeared following 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 that increase with time.
They were popular because they were able to be obtained quickly, and without having to provide documents.
How a NINJA Loan Functions
Financial institutions that provide NINJA loans base their decision on the borrower’s credit score without a evidence of income or assets such like income tax returns or pay stubs. statements from banks and brokerages. Borrowers must have a credit score of at least a certain level to be eligible. Because NINJA loans are usually offered by subprime lenders their credit score requirements might be less than the requirements of mainstream lenders, such as major banks.
NINJA loans are structured with varying terms. Some may offer an attractively low interest rate at first, which grows as time passes. Borrowers are required to repay the loan within a scheduled time frame. Failure to pay the debt can cause the lender to take legal action to recover the debt, which could result in a decrease in credit scores of the borrower and ability to obtain other loans later on.
The risks of NINJA loans
Because NINJA loans need so little documents compared, say the traditional home mortgage or business loans the application can be swiftly processed. Their speedy delivery makes them appealing to some borrowers, particularly those who don’t have the usual documentation or aren’t able to produce it.
The loans can, however, pose a risk for both the lender and the borrower. Since NINJA loans do not require proof that they are collateral-backed, they are not secured by any assets that the lender can seize in the event that the borrower falls behind on the loan.
NINJA loans can be extremely risky for the person who is borrowing them because they are not governed by the traditionally conservative bank underwriting policies that usually protect both parties from danger. The borrower may be enticed to take out bigger loans than they can reasonably expect to repay especially if they concentrate on a low interest rate that will rise in the future.
NINJA loans can be extremely dangerous for both lenders and borrowers alike.
NINJA Loans and the Financial Crisis
After a large number of loan defaults contributed to the financial meltdown of 2008 and a crash in the value of real estate in many parts of the country, the government enforced stricter regulations on lenders, making loans more tightly controlled than they were before and mortgage loans having the most impact.1
The legislation of 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act established new lending standards and loan applications. The new regulations mostly did the job of NINJA loans and required lenders to gather more complete details about potential borrowers and their credit scores as well as evidence of their employment as well as other sources of income.
The proliferation of NINJA loans was a contributing to both the 2007-2008 Financial Crisis and housing bubble. A research paper estimates that such loans accounted for $100 billion, which is 20% of the total losses, tallied during the crisis.2
Do NINJA Loans Still available?
NINJA loans are largely no longer in the United States due to tighter lending regulations that were put in place following the financial crisis of 2008-09.
Why did banks offer NINJA Loans?
In the years prior to the economic crisis, banks were able to make a lot of money from writing home loans. NINJA loans were originally designed to help borrowers who were having difficulty producing the necessary paperwork to prove their earnings and assets, such as previous tax returns, as they earned their money from sources that aren’t traditional and where documents aren’t available for example, tips or personal businesses. These lenders typically extend loans to borrowers based purely on their credit score, without any further documentation of their capability to pay.
What Are Other Terms for NINJA Loans?
NINJA loans (no earnings or job, and without assets) are a kind of no documentation or low (low/no doc) loan, also known as “liar loans.”
The Bottom Line
In the early through mid-2000s NINJA loans (which did not require not to provide documentation for the existence of a job, income or assets) contributed to the rise in the housing market and its it’s subsequent collapse that coincided with 2008-09 financial crisis as well as the subsequent Great Recession. Since then the new rules have mostly stamped out this practice.
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