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Home » Auto Loans » Subprime Auto Loans Driving the Next Financial Crisis

Subprime Auto Loans Driving the Next Financial Crisis

March 7, 2020 by Brian Allen

Will Bad Credit Auto Loans Drive Us Into the Next Recession?

Think about the amount of time in your life you have spent in a car. Commuting, traveling and everything in between; cars are a huge part of American society. But it’s not easy to get a car, and many people have to take out auto loans to buy one.

Law student Andrew Schmidt of the University of California, Berkeley, School of Law, argues in his article that bad credit auto loans could cause a major crisis for the national economy. Schmidt urges officials, lawmakers, and regulators to step in and make changes in the car credit market to discourage lenders’ from issuing deceptive subprime auto loans.  Americans are now paying more for car loans than ever.  However, the Fed did recently lower auto loan rates, but this will only help consumers that have good credit.  In fact, interest rates recently hit a 22 month low.


How Credit Scores Impact Bad Credit Auto Loans

According to Investopedia.com, subprime borrowers are individuals with credit scores below 670. This indicates to lenders there is a greater chance of these borrowers not paying back a loan. As a result, subprime borrowers will have a harder time finding lenders to grant them loans, and will typically have to pay higher interest rates if they do get a loan.


Why Some Subprime Auto Lenders Are Shady

Schmidt exposes that lenders are taking advantage of subprime borrowers’ dire need for an auto loan by setting incredibly high interests and pricing the car twice as much as the Kelley Blue Book value. Subprime borrowers, with limited choices to access a loan but desperate for a car, agree and grow the financial burdens they are already carrying.

To add insult to injury, lenders will deliberately ensure a car breaks down within a few months by installing devices that stop the car’s engine from functioning. Consumers will voluntarily allow their car to be repossessed, lenders’ avoid hiring a third party to track down the vehicles, reap profit, and are able to resell the car on similarly strict terms. Meanwhile, the consumer is in crippling financial debt they may not be able to pay off and then face lawsuits. Schmidt says these tactics must be addressed before it triggers massive consequences on the economy. He states the risky auto lending and subsequently high demand for used cars is leading to price inflation, similar to the 2008 housing crisis.

Agencies that should be ensuring another recession does not happen, such as the Consumer Finance Protection Bureau and the Federal Trade Commission, are not prosecuting subprime auto lenders. Schmidt explains that, while lenders’ tactics do not account for borrower’s ability to repay loans, they are technically fair for individuals with subprime credit scores.


How Bad Credit Lenders Could Be Held Accountable

Schmidt says that any possible solutions must be flexible. If enforcement is too harsh, subprime borrowers will not be able to get cars at all. He proposes aggressive enforcement of current laws such as Dodd-Frank, instead of a new law that could take years too late to go into effect.

Specifically, Schmidt is calling for agencies to scrutinize lenders more closely. This lets agencies deal with lenders on a case-by-case basis, but still uphold the uniform principles of Dodd-Frank. Schmidt does not, however, describe how to get agencies on board this effort. Only 13 of the 135 actions the Consumer Finance Protection Bureau took in 2018 impacted subprime auto lenders. If regulators do not pump the brakes, as Schmidt says, this auto loan bubble may soon burst.


Filed Under: Auto Loans

About Brian Allen

Brian Allen has been helping people make smarter financial decisions for over 10 years. As the Editor-in-Chief for Goloans, Brian writes about sage financial advice, "how to" articles, and reviews about lenders and creditors.

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