One of the contributing factors to the housing market crash in 2008 was the prevalence of “subprime” mortgage loans. These loans were extended to borrowers with less favorable credit and a high risk of default. Typically, these loans had adjustable rates that were simply impossible for these borrowers to repay. In the case of a mortgage, if a borrower is delinquent in making timely payments to the loan servicer, the lender may take possession of the property through foreclosure.
Although our economy has gradually recovered from the crisis in 2008, subprime loans are on the rise again—but this time, lenders are targeting consumers purchasing new vehicles. As bankruptcy practitioners, we at the Mlnarik Law Group have seen a rise in these unfavorable loans amongst our clients.
Since 2010, the percentage of auto loans considered “deep subprime” has risen to 32.5 percent from 5.1 percent. “Deep subprime” in this context means loans extended to borrowers with a credit score of 550 or less. These loans may have interest rates between 15-20 percent or higher, and include other restrictive terms about repayment, resale of the vehicle and even a consumer’s ability to relocate across state lines. Some loans allow repayment for a term of up to 84 months, greatly increasing the amount of interest and fees a borrower will pay.