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What Is a NINJA Loan?

What is a NINJA Loan Works

The risks of NINJA loans

NINJA Loans and the Financial Crisis

FAQs

The Bottom Line

Personal Finance Lending

NINJA Loan: Definition, History, Current availability

By Julia Kagan

Updated August 11, 2022

Review by Julius Mansa

What Is a NINJA Loan?

An NINJA loan is an informal term used to describe a loan granted to a borrower with little or no attempt by the lender to determine the applicant’s ability to repay. It is a reference to “no income not working, no income, or assets.” Although most lenders ask loan applicants to provide evidence that they have a steady flow of income or adequate collateral however, the NINJA loan doesn’t require that verification procedure.

NINJA loans were more prevalent prior to the 2008 financial crisis. In the aftermath of the crisis government officials from the U.S. government issued new rules to improve lending practices across the credit market. These regulations included tightening the criteria for granting loans. As of now, NINJA loans are rare and, in some cases, out of existence.

Key Takeaways:

A NINJA (no income or job or assets) loan is a term describing a loan given to a borrower who may have no ability to pay back the loan.

A NINJA loan can be extended without verification of the borrower’s assets.

NINJA loans were mostly gone following the U.S. government issued new guidelines to improve lending practices following the 2008 financial crisis.

Some NINJA loans provide attractive low interest rates which rise in time.

They were very popular due to the fact that they were able to be obtained quickly and without having to provide documents.

How does a NINJA loan works

Financial institutions that offer NINJA loans make their decisions based on a borrower’s credit score without evidence of assets or income, such like income tax returns and pay stubs. bank and brokerage statements. The borrower must have a credit score of at least a certain level to qualify. Because NINJA loans are usually offered through subprime lenders their credit score requirements might be less than those of mainstream lenders, like large banks.

NINJA loans are structured with varying terms. Certain loans may provide a low initial interest rate that will increase over time. The borrower is required to pay the debt according to an agreed upon time frame. Failure to pay the debt can cause the lender to pursue legal measures to recover the debt, which could result in a decrease in the credit score of the borrower and ability to obtain another loans at a later date.

Risks of NINJA Loans

Because NINJA loans need so little documents compared, say conventional home mortgages or business loans The application process is processed quickly. The speed of processing attracts a lot of customers, especially those who lack the customary documentation or aren’t able to provide it.

The loans are, however, able to be extremely risky for the lender and the borrower. Because NINJA loans require no evidence that they are collateral-backed, 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 extremely risky for the person who is borrowing them because they are not governed by the traditionally conservative banking underwriting procedures that tend to protect both parties from problems. It is possible that borrowers will be enticed by the prospect of being able take out bigger loans than they can reasonably afford to repay especially if they concentrate on a low initial interest rate that will rise in the near 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 helped trigger an economic crisis in 2008 and an ebb in property values across the country, the federal government imposed stricter rules on lenders and made loans more tightly controlled than before and mortgage loans seeing the greatest impact.1

In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act established new lending standards in addition to loan applications. The new regulations mostly did the job of NINJA loans, requiring lenders to gather more complete details about potential borrowers, including their credit scores and documented evidence of their employment as well as other income sources.

The growth of NINJA loans was a key to both the 2007-2008 Financial Crisis and housing bubble. A research paper found that these loans accounted for $100 billion, roughly 20% of total losses, tallied during the crisis.2

Do NINJA Loans Still Available?

NINJA loans have largely ceased from being available within 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?

Prior to the financial crisis banks began to profit from the writing of home loans. NINJA loans were originally created for borrowers who had difficulty producing the necessary paperwork to prove their earnings and assets, such as prior tax returns because they derived their income from non-traditional sources, where documentation is unavailable like tips or a personal company. These lenders typically extend loans to borrowers solely on their credit score, with no further proof of their capacity to pay.

What are other terms for 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

Popular in the early- to mid-2000s, NINJA loans (which required no documentation to prove a job, income, or assets) contributed to the rise in the housing market and its subsequent collapse coinciding with the financial crisis of 2008-09 and the subsequent Great Recession. Since then, new regulations have largely removed this form of financing.