Attorney John Mlnarik
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Subprime Auto Loans
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.
But what does this mean going forward? For consumers in the market for a new vehicle, it may be possible to secure financing despite a low credit score, or no credit score at all. While this may seem like a benefit if you’re in the market for a vehicle right now, a default on a secured auto loan could result in repossession of the vehicle, late notations on a credit report and lasting damage to your credit score. Consumers should shop around with different lenders when researching a new vehicle. Don’t just accept the dealership’s financing offer—be prepared to secure your own financing prior to your trip to the dealership. Credit unions are a great resource for auto loans with favorable rates. Most importantly though, borrowers should create a budget and determine how much money on a monthly basis could be realistically allocated to car payments. At the Mlnarik Law Group, we can consult with you on the terms of an auto loan, and discuss the pros and cons of entering into that contract.
For the market generally, this new trend could have devastating consequences. While the repercussions wouldn’t be on the same level as the housing crisis in 2008, it could lead to another bubble creating losses for banks and consumers alike. As Wall Street banks have found it tougher to profit under new regulatory regimes for mortgages born out of the last subprime crisis, they’ve become more willing to underwrite riskier auto-loan asset-backed security sales.