Should you get a new car with a Subprime Auto Loan? And what exactly is a Subprime Auto Loan? (Part 1 of 2)

Do you remember just a few years ago, when people with very questionable credit were able to get home loans with zero down payment?   Many of those people were unable to make their monthly mortgage payments, and the houses ended up going into foreclosure.  It ended in a national mortgage crisis.  We’re still seeing the results of that crisis.  In many neighborhoods, especially in the inner-cities, there are several abandoned houses that are lowering the sales prices for the remaining owner-occupied houses.  That crisis also led to the downfall of many lending institutions, who were no longer getting a return on the investment they had made when making these loans.  And it’s led to a large percentage of these houses that are resold going to investors who rent them or attempt to “flip” them rather than to owners who are looking to put down roots and live the American dream.

Needless to say, this has worked out very well for bankruptcy attorneys over these years, but not so good for debtors trying to raise families.

Well, now a breed of lenders has come into existence that want to use these same tactics to encourage people with poor credit to take on auto loans that they can’t afford.   Granted, we all need transportation to get to work and to carry on our normal living functions such as the grocery store, doctor’s appointments, recreation, etc.  But are these needs worth getting into a precarious financial situation?

The ads enticing people to enter into these loans are out there:

“When you don’t have perfect credit, or no credit at all, it can be sometimes very difficult to purchase a car.”

Obviously, that’s true. You may have been recently discharged from the military, or a recent high school graduate, or recently divorced, and find that because you don’t have a credit history or a good job, many lenders are reluctant to finance a car loan for you.  Or the credit history you do have may be tarnished by credit card debt, payday loans, or medical bills.  Most auto dealerships and the banks they work with prefer to give loans to “prime” borrowers, which are people with excellent credit who are likely to pay off their auto loans completely and on time.  Everyone who doesn’t qualify for the “prime” category would fall into “subprime”.

“If you have bad credit or no credit, a subprime auto loan may be just what you need to be able to purchase the vehicle you want.”

These ads try to soft-pedal the downside to subprime loans, by stating that the subprime loan carries an interest rate just a little higher than that given to a prime borrower.  They explain that this is necessary to protect the subprime lender by giving them more interest since they are taking on more risk that they won’t be repaid.  Just a little higher?  In reality, these subprime auto loans can come with interest rates that exceed 23%!  And it appears that the vehicle you want will be a used car, purchased from a used car lot rather than a dealership.  Further, a study by the New York Times revealed that these subprime loans were typically at least twice the value of the used cars purchased!  Even more horrendous, the study exposed the fact that quite often, the vehicles sold to subprime borrowers had mechanical defects that were hidden from them.

It is estimated that millions of Americans are easily obtaining these subprime auto loans on cars that they cannot possibly afford, in a lending market comparable to the lack of caution seen in the housing industry before it collapsed in 2008.  In fact, auto loans to people with tarnished credit have risen more than 130% in the past several years, with an estimated one in four new car loans last year alone going to subprime borrowers.  These loans can push borrowers who are already credit-challenged further into debt, even leading some into bankruptcy.


About Barbara Horwitz

Barbara Horwitz is an experienced bankruptcy attorney helping people get past financial difficulties. She believes in creating a relationship with clients and is dedicated to making the bankruptcy process as easy and stress-free for clients.

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