Close Menu
Basic Finance Care

    Subscribe to Updates

    Get the latest creative news from FooBar about art, design and business.

    What's Hot

    The Rise of Digital Wallets: How They are Changing Payments

    May 2, 2025

    Why Smart Finance Firms Hire Expert Financial Writers (And You Should, Too!)

    April 29, 2025

    Bankruptcy Costs: What You Need to Know Before Filing

    March 21, 2025
    Facebook X (Twitter) Instagram
    Facebook X (Twitter) Instagram
    Basic Finance CareBasic Finance Care
    SUBSCRIBE
    • Home
    • About Me
    • Contact Us
    • Hire Me
    • Blogs Accepting Guest Posts
    • Submit Finance Guest Post
    Basic Finance Care
    Home » Is Subprime Auto Loan a Harbinger of a Financial Crisis?
    Auto Loans

    Is Subprime Auto Loan a Harbinger of a Financial Crisis?

    James PaulBy James PaulNovember 15, 20155 Mins Read
    Financial Crisis
    Share
    Facebook Twitter LinkedIn Pinterest Email

    My previous article was on a subprime mortgage. In that article, I very briefly talked about deep subprime loans in the automobile industry and how it could trigger a crisis.

    Later, I felt this topic requires an elaborate discussion and decided to churn out a new article focused exclusively on it. So in this article, I am going to discuss how a subprime loan is affecting the auto industry and how the economy at large could be affected by it.

    Who take these loans?

    Figuratively speaking, a crisis is like a recipe and the elements that trigger it are the ingredients. In case of subprime lending, imagining it could lead to a medium-scale financial crisis, one of the ingredients is people with poor credit score taking auto loans.

    The majority of these people are reckless in nature. They don’t think of the consequences. Not being able to pay off the debt could damage their credit report beyond repair. They don’t consider this as a possibility when they take auto loans.

    Increase of delinquency

    Data from the Federal Reserve Bank of New York indicate there’s a huge increase in the number of delinquent subprime auto loans. The data also indicate traditional banks have given 4.4% of subprime auto loans, compared to 9.7% loans, approved by equity backed private firms and non-banking lending agencies.

    Auto finance companies reported a much higher level of delinquency rate as compared to banks and credit unions. Take a look at the graph below:

    The difference is visible in the graph above. The reason behind the difference is underwriting norms. Banks, especially the traditional ones have stringent underwriting policies. Auto finance companies, however, relaxed underwriting guidelines to lure new customers. Their myopic approach to lending is causing the delinquency rate to go higher.

    Market share

    Auto finance companies hold a whopping 70% share of the market and offer loan to the riskiest of borrowers. The total worth of this market is $200 billion. The more it balloons, the higher becomes the risk of a crisis.

    The apparent silver lining

    It seems streams of news indicating a surge in subprime auto loan has hit a nerve. Melinda Zabritski, a senior director working in Experian observed: “We started to see delinquencies go up, and lenders really seemed to respond especially in Q1 of this year (2017) by tightening up a little bit.”

    Market observers are reporting a pullback from lenders and buyers. A study conducted by Experian in 2017 showed subprime and deep subprime credit ratings are at a 10 year low. In the first quarter of 2017, both categories of lending dropped almost 9%.

    This, in my opinion, was seemingly silver lining. I used the word apparent because data received from the fourth quarter of 2017 didn’t look very promising. A number of private-equity firms who earlier gave deep subprime auto loan suddenly discovered how incredibly hard it is to bail out customers.

    As subprime auto defaults kept rising, giving equity-based firms a hard time cleaning up the mess, many wondered whether this could lead to a crisis?

    Could it?

    Luckily, most of the defaulters are people who took the loans way back in 2011 or even before 2011. It means the high rate of defaults might continue only for a short period. The only way we can get an idea of the future is by looking at the present. As the present rules governing subprime auto lending is becoming tighter, we can expect there’ll be no crisis in the future.

    Where it all started

    Subprime mortgage lending, as opposed to subprime auto loans, has a history that’s more or less known by all of us. The latter has a rather shoddy history. It’s mainly the non-banking agencies responsible for the current-day crisis.

    After the 2008 market-crash, the only remaining avenue for profiteers was high-interest auto loans. Billions of dollars were poured into the auto loan industry. By then, the lending guidelines became stricter and the number of people taking auto loan remained far less than that of people who refinanced their homes prior to the 2008 fiasco.

    These are the two reasons subprime and deep subprime auto loans never turned into an ugly crisis. However, the financial regulators and authorities could have done more than what they did. They are partly responsible for the high rate of car loan defaults, seen in recent time as they should have taken preventive steps way earlier.

    After big banks quit

    Analysts agree that delinquency rate being high started getting noticed after big banks quit from the auto lending space. It dried up fresh investment dollars, but in a way, it was a good thing as a full-blown crisis can now be avoided.

    Concluding remarks

    The century-old adage says “better safe than sorry.” It’s not too late for regulators to introduce new measures to change lax guidelines. It’s good that they started circling the industry. They should continue doing this.

    Avery Richardson is a personal finance blogger and writer at moneymanagementiq.com, who loves to write and educate people about money management and frugality.

    Share. Facebook Twitter Pinterest LinkedIn Tumblr Email
    James Paul
    • Website

    Related Posts

    How to Determine if a Car Title Loan is Right for You

    August 7, 2020

    Online Auto Loan: Best Finance Deal Is Waiting for You!

    April 15, 2017

    Is It Too Hard To Get an Auto Loan – Oh No, It Isn’t

    December 1, 2016

    Things You Should Consider Before Applying for a Car Loan

    April 1, 2016

    Auto Loans in Australia – The Things to Know Before Taking One

    October 17, 2015

    Car Title Loans vs. Auto Title Equity

    September 30, 2014
    Add A Comment

    Comments are closed.

    Don't Miss
    Personal Finance

    The Rise of Digital Wallets: How They are Changing Payments

    May 2, 2025

    E-wallets, or virtual wallets, are revolutionizing the way we pay and store money. They are…

    Why Smart Finance Firms Hire Expert Financial Writers (And You Should, Too!)

    April 29, 2025

    Bankruptcy Costs: What You Need to Know Before Filing

    March 21, 2025

    From Injury to Settlement: 5 Key Steps to Maximize Your Slip and Fall Claim

    March 11, 2025
    Our Picks
    Stay In Touch
    • Facebook
    • Twitter
    • Pinterest
    • Instagram
    • YouTube
    • Vimeo
    Demo

    Subscribe to Updates

    About Us

    I’ve managed to graduate college free of student loans. My mission is to make people understand importance of money management and take sound financial decisions.

    This blog is my attempt to help to be prudent while dealing with saving, debt, credit, investment, insurance, spending or any financial issue. I am here to make your financial life to be sound and secure.

    If you like the articles posted here and interested to hire me for your content writing projects, feel free to contact me.

    Our Picks

    The Rise of Digital Wallets: How They are Changing Payments

    May 2, 2025

    Why Smart Finance Firms Hire Expert Financial Writers (And You Should, Too!)

    April 29, 2025

    Bankruptcy Costs: What You Need to Know Before Filing

    March 21, 2025
    New Comments
      Facebook X (Twitter) Instagram Pinterest
      • Home
      • Contact Us
      • About Me
      © 2025 Designed by Basic Finance Care.

      Type above and press Enter to search. Press Esc to cancel.