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Road Hazard: Subprime Loan Delinquencies on the Rise
Monday, May 2, 2016 6:40 AM

Paralleling the growth in auto loans, in general, subprime loans have been booming, making up about one-fifth of the nearly $1 trillion auto loan market, reads an article in Credit Union Journal. That same article then asks, are we headed for a bust?

The piece cites a new survey from, which suggests the rising number of subprime auto loans is also leading to historic new highs in delinquencies and losses.

Indeed, the report from MagnifyMoney suggests the current climate for subprime auto lending is dangerously similar to the scenario surrounding the subprime mortgage market from the prior decade in terms of shaky underwriting and substandard background checks.

MagnifyMoney's survey (which queried 673 American automobile owners who took out loans) revealed 64.4 percent of auto loan borrowers let the dealer find them a loan, rather than finding one for themselves; 52.1 percent of auto loan borrowers never had their income verified when applying for the loan; and an overwhelming 82.6 percent of auto loan borrowers who took out long-term loans (terms in excess of five years) did so in order to have lower monthly payments. The other 18 percent or so took out the lengthy loans due to pressure from the dealers themselves.

Subprime Meltdown Revisited?

Nick Clements, founder of MagnifyMoney, sees similarities to the subprime housing market of the 2000s—practices that led to the near collapse of the U.S. economy. He posits that with respect to automobile dealers of today and the mortgage brokers of the 2000s, there are risks that they could play the same role.

"The interest of auto dealers are not always aligned with the interest of their customers," he said. "[Auto] dealers resemble the mortgage brokers, making money on the sale of cars and the dealer discount from lenders. Verification requirements are minimal. Complexity is increasing and the opportunity to commit fraud becomes more widespread."

Back in the 2000s, Clements cited, mortgage brokers generated sky-high commissions on loans they booked — they made the money from the outset and did not suffer the consequences if the loans went bad later. "The brokers had a high incentive to book as many loans as possible, regardless of the credit risk," Clements commented, with many not always verifying a borrower's income or credit score.

Similarly, auto dealerships make money when they sell cars and make commissions (dealer discounts) when they sell auto financing, he explained. Now, auto finance companies are seeking to win the auto dealer's business, leading many of them to weaken the credit criteria and relax income verification measures.

"The dealer networks, which control the customer and the volume, have a lot of power over banks and finance companies hungry for volume," Clements noted. "If a bank asks too many questions, the dealer can easily move to the next easiest lender."

Read more about this topic at Credit Union Journal.