The collapse of the US housing market was largely blamed on banks offering “subprime mortgages” to a large number of people. As time went on and the economy struggled more, the interest rates increased and borrowers were expected to meet repayments they could simply not afford. This resulted in a massive growth in property repossession in the United States, leaving many people homeless.
Subrime loans are those which are offered by lenders to borrowers who may not have passed the normal criteria for lending. This involves providing credit to those who may not necessarily have had access to the credit market. Examples would include people with previous debt defaults, first time lenders, people with a bad credit history etc. The loans are provided on the basis that the repayments are at a premium or higher rate. This means the borrower gets the loan but the repayment amounts are significantly higher than those with a decent credit history. The offer of obtaining a property would have seemed attractive to someone desperate for their own house but as the market suffered and interest rates increased, the number of people struggling to make repayments also did. This may have been a result of change in circumstances or loss of work, or even the fact that the cost of living is on the rise.
Following the boom in subprime mortgages, it appears banks and lenders are now targeting a whole new market – the car buyers. Credit Score company, Experian has reported a sharp rise in the number of subprime auto loans available, a change in the cautious approach which had been implemented by lenders over 2009 and 2010 following the collapse of the housing market.
People who were previously unable to buy a car because their credit was bad or because they simply couldn’t afford it are now being offered the latest models coupled with a “slightly higher loan”. For some this may be a great deal, if their financial circumstances can manage it then they may have to make slightly higher repayments but they get a car they may not have previously. For others, this can mean they are spending above their means, and the attraction of a new car pushes them to make an agreement they can’t fulfill. This can ultimately lead to their car being repossessed as they begin to miss their repayments.
Experian have stated that the percentage of subprime car loans has increased from 37.2% at the end of 2010 to almost 41% in 2011.
From a lender’s perspective the ability to repossess a car is much easier than repossessing a house. They can send the repo man out and pick up a car in a matter of hours and then resell it quickly through a repossessed car auction. In contrast, repossessing a house is much more difficult and can take a vast amount of time. This makes subprime car loans an attractive proposition for a lender as a car is a lower risk.
If you are considering a subprime car loan we would advise to check the repayment amounts and make sure they affordable for you. Don’t forget the other costs involved when owning a car – petrol, insurance, taxes etc. Also look at the interest rates and the total repayment amount, is the total viable? All of these checks can help you avoid car repossession.