What is a NINJA loan?
A NINJA loan is a slang term for a loan given to a borrower, with little or no attempt on the part of the lender to verify the ability of the applicant to repay. It means “no income, no job and no assets”. While most lenders require that loan applicants provide evidence of a steady stream of income or sufficient collateral, a NINJA loan skips this verification process.
NINJA loans were more common before the 2008 financial crisis. In the aftermath of the crisis, the United States government issued new regulations to improve standard lending practices in the credit market, including by tightening lending conditions . At this point, NINJA loans are rare, if not extinguished.
How a NINJA loan works
Financial institutions that offer NINJA loans base their decision on the borrower’s credit rating without verification of income or assets, such as through income tax returns, pay stubs or bank statements and brokerage. Borrowers must have a credit score above a certain threshold to be eligible. Since NINJA loans are generally made through subprime lenders, however, their credit score requirements may be lower than those of traditional lenders, such as large banks.
NINJA loans are structured with varying conditions. Some may offer an attractively low initial interest rate that increases over time. Borrowers are required to repay the debt according to a scheduled schedule. Failure to make these payments may cause the lender to take legal action to collect the debt, resulting in a lower credit rating for the borrower and the possibility of obtaining other loans in the future.
Pros and Cons of NINJA Loans
Because NINJA loans require so little paperwork compared to, for example, traditional home mortgages or business loans, a loan application can be processed quickly. This makes them attractive to some borrowers, especially those who do not have the usual documentation or do not wish to produce it.
Loans can, however, be very risky – for both the lender and the borrower. Because NINJA loans require no proof of collateral, they are not secured by any assets that a lender could seize if the borrower defaults on the loan.
NINJA loans can be very risky for both the borrower and the lender.
NINJA loans are also risky for the borrower, unhindered as they are by the traditionally conservative underwriting practices that often keep both sides in trouble. Borrowers can be encouraged to take on larger loans than they can reasonably expect to repay, especially if they focus on a low introductory interest rate that will increase in the future.
After a high level of defaults helped set off the 2008 financial crisis and collapsed real estate values in many parts of the country, the government imposed tougher rules on lenders, making loans more regulated than previously, mortgages having the greatest impact. The Dodd – Frank Wall Street Reform and Consumer Protection Act of 2020 created new standards for loan and loan applications. The new rules have largely eliminated NINJA loans, requiring lenders to obtain more complete information about potential borrowers, including not only their credit scores, but also documented evidence of their employment and other sources of income.