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The next subprime crisis is looming, only this time its car loans

On Behalf of | Aug 18, 2016 | Chapter 13

Nearly everyone in Tennessee is familiar with the housing bubble that ultimately burst and caused the Great Recession. Now a new bubble is on the horizon. This one involves auto loans and while it will probably not devastate the economy in the same way, it could lead to trouble for both borrowers and car dealers.

According to Yahoo Finance, the car industry is experiencing a boom right now, thanks to the availability of loans to subprime borrowers. These people have low credit scores as the result of bankruptcy or other reasons, and in the past would not have qualified for a low interest car loan. Banks are giving out loans to many of these subprime borrowers, only these customers are stretching out the length of the loans in order to be able to afford the monthly payments. This means that they will not likely be purchasing another new car for many years to come. So while the industry is experiencing growth at the moment, that momentum may grind to a halt in a few short years as people keep their cars for longer and longer.

Thanks to the Great Recession, many people now have what would be considered subprime credit scores. Generally, a score of 619 or lower qualifies a borrower as subprime according to Bankrate. However, just because people have a subprime credit score does not that they cannot or should not purchase a new car. It simply means that they should take some precautionary measures so that they understand all of the terms and they do not get ripped off.

One of the most important factors subprime borrowers should consider is whether or not they can afford the monthly payment. Second, if they can make the payment each month, they should take in to account the big picture. If they agree to a longer loan to get the monthly payment down, that means that they will be paying more for the car over time in interest. If the numbers do not add up, buying the car may not be worth it and they may want to explore a more affordable option.


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