Editorials

August 3, 2014

EDITORIAL: Subprime loan problem is back -- now it's cars

Not even a decade after Wall Street gamblers took us to the brink of global economic ruin, the same players are back abusing the financial product that caused so much trouble — the subprime loan.

Not even a decade after Wall Street gamblers took us to the brink of global economic ruin, the same players are back abusing the financial product that caused so much trouble — the subprime loan.

This time the loans are for used cars sold to lower-income Americans who can't afford them. It's such a lucrative market that, according to the New York Times, subprime car loans have increased by 130% in the past five years. And Equifax reported that subprime auto lending was the highest it has been since 2006.

The deals sound the same, too: Millions of people with terrible credit and no real way of repaying big debts are handed auto loans for used cars. Sometimes their financial information is exaggerated or even false.

The purveyors of these loans are financial institutions with familiar names, such as Wells Fargo, and private equity firms that have lots of money to spend and not enough get-rich-quick ways to invest.

It's apparently good business to steal from the poor, so much so that firms are bundling up the loans and selling them as securities to banks and mutual funds. Maybe even one of yours.

The good news is that, as repugnant as this practice may be, it's unlikely to threaten the U.S. economy in the same extreme way that the implosion of the housing market did in 2008. Cars are much easier to repossess than homes.

However, jobs are in such demand that workers will do most anything to keep them — including signing a contract for a car they know they can't afford so they can go to work each day.

For people with decent credit and moderate salaries, auto loan rates at the moment range between 4.14% to 4.71%, depending on the length of the loan.

Rates that subprime borrowers pay are significantly higher, as much as 23%. That means that if they managed to pay off their car loan, they've paid the equivalent of two cars.

This is not the only way that poor folks have been preyed upon when trying to buy a car in legal if reprehensible ways. In 2011, the Los Angeles Times documented how Buy Here Pay Here dealerships were ripping off people with bad credit by financing cheap used cars at about 30%.

In California, those revelations led to legislation that tightened rules about how cars are repossessed and require used-car dealers to provide better disclosure to customers.

Subprime auto loans are bad news for consumers and to our country's fiscal health.

Lawmakers should rein them in.

 

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