A major portion of the last financial crisis was attributed to subprime mortgage lending. Currently there is the concern that a latest jump in subprime vehicle loans might spell disaster in the markets.
As per New York’s Federal Reserve Bank, auto loans given to borrowers having credit scores less than 660 has almost become twice since 2009 – a considerable increase compared to any other kind of loan. Several studies also revealed repossessions soaring.
Are the trends predicting another crash of the stock market? Experts answer in the negative; however, still reasons exist for people holding subprime loans to be careful.
What is the reason behind people being so concerned regarding subprime auto lending?
It is not simply the count of loans for borrowers possessing low credit score, but analysts are also worried about dealer misbehavior as well as involvement of subprime auto loans within the stock market.
According to economics professor Lawrence White, every subprime loan is not inappropriate. However, lenders must not put borrowers into loans which they cannot afford.
Subprime auto loans are categorized as risky securities, as was done for subprime mortgage loans during the end of 2000s.
So, is a subprime lending bubble on the way?
A majority are hesitant to believe so.
Senior economist Mike Schenk, feels the increase is as per expectations. He says that the downturn made a number of people belong to that category. But currently, there are many who are back on track.
Scale can also be considered a factor.
The auto loan market’s overall size is below one-tenth of the total size of the mortgage market. Similar economy-shaking outcome like the fall of subprime mortgage lending may not occur.
A greater rate of defaults in auto loan may not tank the markets. But dubious lending practices still hurt certain auto loan borrowers who are more vulnerable.
Over 50% of consumers in a majority of states possess subprime credit.
Predatory loans push borrowers with low income at risk for repossession, disrupting their capability of getting to work. They also make other portions of borrowers’ budgets stressed.
Are there any steps being taken with respect to deceptive loan practices?
Assistant director, Division of Financial Practices, Federal Trade Commission, Malini Mithal, said that in the recent past, over 20 cases have been brought for providing protection to consumers in case of auto-related actions. A number of these revolve around issues that affect subprime consumers.
Last January, a group of dealerships was cracked down by the agency on grounds of misrepresenting the monthly payments of customers. There are also other cases addressing dealerships which made it possible for customers to trade in vehicles over which money was still being owed. This called for paying off the old as well as new cars simultaneously.
Mithal said that a car is one of the largest purchases of a consumer, and drivers frequently figure the sum they can shell out to the dollar. Unlawful lending practices might lead to a big impact so far their bottom lines are concerned.