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Subprime Auto Loans Increase

Posted by Steve Markowitz on September 27, 2014

USA Today reported on the growing number of subprime auto loans being made in the United States. Such loans are made to high-risk borrowers with poor credit scores.  According to USA Today:

  • Since 2009 the number of auto loans made to high risk borrowers with credit scores below 660 has doubled.
  • In the past year the repossession rate for automobiles has increased by 70%.
  • The amount of interest paid by consumers for auto loans is staggering. For those purchasing automobiles on credit in 2009, an aggregate interest of nearly $26 billion will be paid on those loans.
  • In most states more than one half of the consumers have some form of subprime credit.

It is remarkable that only six years after the subprime mortgage fiasco caused a worldwide economic meltdown, similar high- risk loans practices are gaining momentum. In addition, subprime auto loans are being bundled by Wall Street into risky securities and sold to naïve investors.

While the size of the subprime auto loan market is significantly smaller than that of the subprime mortgage loans, a significant amount of failure amongst these loans will damage the overall economy to some extent.

The subprime mortgage market and the bubble it created were a result of governmental and Fed policies that included artificially low interest rates. The current subprime auto loan market is being created by similar policies.  Once again, artificially low interest rate policies promoted by the Federal Reserve support predatory lending practices to those who should not be given loans.  In addition, this low interest rate environment offers fertile ground for the sale of the securitized loan portfolios to investors seeking higher returns through risk.

In addition, the moral hazard has been damaged by the government’s bailouts that saved imprudent lenders and banks from disaster in 2008/2009. These lenders and their investors expect the government to cover their backs during the next meltdown, even if caused by their imprudent lending practices.

Both political parties avoid discussion of debt the damage it causes. This is by political necessity given the ever-expanding debt financing used by the US government.  Debt is inappropriate if used to create wealth today at the expense of tomorrow’s economic growth potential.  It becomes a tragedy when such debt is promoted by imprudent governmental policies.

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