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What is a NINJA Loan?

What is a NINJA Loan Works

Risks of NINJA Loans

NINJA Loans and the Financial Crisis

FAQs

The Bottom Line

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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 an informal term used to describe the loan given to a borrower who has made little or no effort from the lender to confirm the borrower’s capacity to pay. It stands for “no income not working, no income, as well as no asset.” Whereas most lenders require loan applicants to provide evidence of a stable stream of income or adequate collateral but a NINJA loan does not require verification process.

NINJA loans had been more frequent prior to the 2008 financial crisis. Following the financial crisis government officials from the U.S. government issued new rules to improve lending practices in the credit market. These regulations included tightening the criteria for granting loans. As of now, NINJA loans are rare even if they are not completely extinct.

The most important takeaways

An NINJA (no income or job and no assets) loan is a term describing the loan granted to a person who may not be able to repay the loan.

A NINJA loan is extended without a verification of the borrower’s assets.

NINJA loans largely disappeared following their cancellation by the U.S. government issued new rules to improve standard lending practices after the 2008 financial crisis.

Certain NINJA loans provide attractive low interest rates which rise over time.

They were popular because they could be accessed quickly, and without needing to present documentation.

What is a NINJA Loan Works

Financial institutions that provide NINJA loans make their decisions based on a borrower’s credit score with no evidence of assets or income such like income tax returns and pay stubs. statements from banks and brokerages. Borrowers must have a credit score over a certain threshold to qualify. Since NINJA loans are usually offered through subprime lenders, however, their credit score requirements could be lower than the requirements of mainstream lenders, including major banks.

NINJA loans are designed with different terms. Certain loans may provide a low interest rate which increases over time. The borrower is required to pay the loan within the timeframe they have set. Failing to make those payments can cause the lender to take legal measures to recover the debt, which could result in a drop in the borrower’s credit score and the ability to get another loans later on.

The risks of NINJA loans

Because NINJA loans require so little paperwork compared, for example conventional home mortgages or business loans the application can be swiftly processed. The speed of processing makes them appealing to some customers, especially those who lack the customary documentation or aren’t able to produce it.

The loans can, however, be very risky for both the lender and the borrower. Since NINJA loans don’t require evidence or collateral to secure them, they are not secured by any assets that 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, unfettered as they are by traditional banking underwriting procedures that tend to protect both parties from danger. The borrower may be enticed to make larger loans that they would reasonably afford to repay especially if they concentrate on a low initial interest rate that is likely to increase in the near future.

NINJA loans can be extremely risky for lenders and borrowers alike.

NINJA Loans and the Financial Crisis

Following a spike in loan defaults contributed to an economic crisis in 2008 as well as the crash in the value of real estate in many parts of the country, the federal government imposed stricter rules on lenders which made loans more highly regulated than they had been before and mortgage loans seeing the greatest impact.1

The legislation of 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act created new standards for lending in addition to loan applications. The new regulations mostly did away with NINJA loans and required lenders to gather more complete details about potential borrowers such as their credit scores as well as evidence of their employment and other sources of income.

The amplification of NINJA loans was a contributing factor in the 2007 and 2008 Financial Crisis and housing bubble. One research paper estimates that such loans were responsible for $100 billion, roughly 20% of total losses, as reported during the crisis.2

Do NINJA Loans Still Available?

NINJA loans are largely no longer to exist within the United States due to tighter lending regulations that were put in place in the aftermath of the financial crisis of 2008-09.

Why Did Banks Offer NINJA Loans?

Before the crisis banks became greedy in profiting by writing home loans. NINJA loans were originally designed for those who had trouble producing the necessary paperwork to prove their income and assets, like previous tax returns, as they derived their income from sources that aren’t traditional and where documentation is unavailable for example, tips or personal businesses. Lenders often extended these loans to borrowers solely on their credit scores, with no further proof of their capability to pay.

What Are Other Terms that are used for NINJA Loans?

NINJA loans (no source of income or job, and no assets) are a kind of low/no documentation (low/no documents) loan, also known as “liar loans.”

The Bottom Line

In the early into the mid 2000s NINJA loans (which did not require the submission of no documents to show an income, job, or assets) contributed to the bubble in housing and its subsequent collapse coinciding with the 2008-09 financial crisis as well as the ensuing Great Recession. Since then, new regulations have largely eliminated this type of lending.