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What Is a NINJA Loan?
How does a NINJA Loan Functions
The 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 Availability
By Julia Kagan
Updated August 11 2022
Read 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 with little or no effort by the lender to determine the applicant’s ability to repay. It stands for “no income or job or assets.” Whereas most lenders require loan applicants to show proof of a steady stream of income or adequate collateral but NINJA loans do not require any proof of income or collateral. NINJA loan ignores that verification procedure.
NINJA loans were more frequent before the financial meltdown of 2008. Following the crisis, the U.S. government issued new rules to improve lending practices across the credit market. These regulations included tightening the requirements for granting loans. In the present, NINJA loans are rare and, in some cases, gone.
Key Takeaways:
A NINJA (no income (no job, no income, and no assets) loan is a term describing the loan extended to a borrower who may not be able to pay back the loan.
A NINJA loan is extended with no verification of a borrower’s assets.
NINJA loans largely disappeared after the U.S. government issued new rules to improve standard lending practices following the 2008 financial crisis.
Certain NINJA loans provide attractive low interest rates, which increase in time.
They were very popular due to the fact that they could be obtained quickly and without the borrower needing to submit documents.
How a NINJA loan works
Financial institutions offering NINJA loans make their decisions based on the credit score of the borrower without a verification of income or assets, such as income tax returns or pay stubs. bank and brokerage statements. Credit score that is above a certain threshold to qualify. Because NINJA loans are usually offered through subprime lenders their requirements for credit scores 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 which will increase as time passes. Borrowers are required to repay the debt within an agreed upon time frame. In the event of non-payment, it could cause the lender to take legal measures to recover the debt, which could result in a drop in the credit score of the borrower and ability to obtain additional loans at a later date.
Risks of NINJA Loans
Because NINJA loans need so little documents compared, say, with traditional home mortgages or business loans The application process is completed quickly. Their quick processing attracts a lot of borrowers, particularly those who don’t have the usual documents or do not want to provide it.
The loans can, however, be very risky for both the lender and the borrower. Since NINJA loans do not require proof of collateral, they are not secured by any assets that lenders could take if the borrower defaults on the loan.
NINJA loans can be dangerous for the borrower in a way that is not restricted by traditional bank underwriting practices that often protect both parties from trouble. Borrowers may be encouraged to take out bigger loans that they would reasonably afford to repay in particular if they are focusing on a low initial interest rate that is likely to increase in the future.
NINJA loans can be extremely dangerous for both lenders and borrowers alike.
NINJA Loans and the Financial Crisis
After a high level of loan defaults contributed to an economic crisis in 2008 and the crash in the value of real estate in many parts of the country, the government introduced stricter guidelines for lenders, making loans more tightly controlled than they had been before and mortgage loans experiencing the biggest impact.1
The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act created new lending standards as well as loan applications. The new regulations mostly did away with NINJA loans which required lenders to gather more complete information on prospective borrowers such as their credit scores and documented evidence of their employment as well as other sources of income.
The proliferation of NINJA loans was a major factor in the 2007 and 2008 Financial Crisis and housing bubble. One research paper found that these loans were responsible for $100 billion roughly 20% of total losses incurred during the crisis.2
Do NINJA Loans Still Available?
NINJA loans have mostly ceased to exist throughout the United States due to tighter lending guidelines that were enacted following the financial crisis of 2008-09.
Why Did Banks Provide NINJA loans?
In the years prior to the economic crisis, banks were able to make a lot of money from the writing of home loans. NINJA loans were initially designed for those who had trouble producing the necessary paperwork to prove their earnings and assets, like previous tax returns, as they got their income from non-traditional sources, where documents are not available, such as tips or a personal business. The lenders often offered these loans to borrowers based solely on their credit scores, with no further proof of the individual’s capacity to pay.
What are other terms to use with NINJA Loans?
NINJA loans (no earnings (no job, without assets) are a type of low/no documentation (low/no document) loan, also known as “liar loans.”
The Bottom Line
Popular in the early- through mid-2000s NINJA loans (which were based on the submission of no documents to show the existence of a job, income or assets) were a major factor in the rise in the housing market and its subsequent collapse , which coincided with the 2008-09 financial crisis and the subsequent Great Recession. Since then the new rules have mostly eliminated this type of lending.
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