Hey, it's great if you're a car repossessor—but for borrowers, the new subprime bubble in used-car loans could become a major headache. According to a New York Times investigation, more Americans with poor credit are taking on unaffordable car loans at high interest rates. The loans usually cost at least double the vehicle's actual value, and are based on bad information about the borrowers' employment and income. The loans are then sold to investors in packages that often get high marks from ratings agencies. Sound familiar? "It appears that investors have not learned the lessons of Lehman Brothers and continue to chase risky subprime-backed bonds," says a former Federal Reserve employee.
A bursting car-loan bubble won't cause the same damage we saw in 2008, the Times notes, because it's much smaller than the old subprime-mortgage market. But low-income Americans are still suffering, as predatory lending tactics have already pushed some into debt and even bankruptcy. It all starts on the lot, where potential buyers may roll over their old car loan, pay extra costs, and "by the end, they are paying $600 a month for a piece of junk," says a bankruptcy lawyer. On the plus side, financial firms say this allows borrowers with bad credit to buy much-needed cars. It's also less dangerous for the economy because cars can easily be repossessed and resold. Still, it's not going unnoticed: A bank-regulating agency says the bubble is growing, CNN Money reports, and some ratings agencies are ringing alarm bells. "We believe these trends could lead to higher losses and weakened profitability in a few years," says a Standard and Poor's analyst. (Read more auto loans stories.)