Times Probe Unveils Next Subprime Bubble
Used-car loans look a lot like old subprime mortgages
By Neal Colgrass, Newser Staff
Posted Jul 20, 2014 4:00 PM CDT
In this Jan. 11, 2011 file photo, a potential car buyer looks over used cars at a dealership in Sacramento, Calif.   (AP Photo/Rich Pedroncelli, File)

(Newser) – 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.

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Showing 3 of 69 comments
CaptainStubing
Jul 27, 2014 3:08 PM CDT
Almost in the words of Rodney King: "Can't we all just get a loan?"
Reader55549798
Jul 23, 2014 10:36 AM CDT
They did too learn, they learned there's money to be made by fleecing people with sketchy credit, and the easiest way to do that currently is through car loans. As soon as they can game the mortgage market again, they'll be back doing that again. But of course, this too is all the car buyers' fault.
Chris Farley
Jul 22, 2014 7:45 AM CDT
The entire economy is a bubble. Artificially propped up through domestic and foreign stimulus (bailouts, stimulus, wars), for 15 years now. It will pop.