Will subprime auto loans cause the next financial crises?

A subprime loan is commonly referred to a secured interest loan made to an individual with a credit score of 620 or lower. Interest rates are normally higher on these types of loans in order to offset the riskier lending. In subprime auto loans, serious delinquencies are showing signs of another financial crisis, leading to questions from U.S. economic policymakers as to whether the economy needs a boost or not. While there isn’t necessarily a problem yet, many believe that the auto finance industry could drag the rest of the U.S. economy with it.

20% of Car Loans to Subprime Borrowers

Of the $1.2 trillion in auto loans balances in the U.S., roughly 20% of them are made to subprime borrowers. The trend emerged from a record year of auto sales in 2016 which was largely fuelled by consumer debt. Now that auto sales in America have begun to level off, and with the Federal Reserve increasing borrower costs, the auto loan industry is starting to look like it could run into trouble. Compounding these problems is the fact that last quarter the Federal Reserve noticed a drastic increase in the number of 90+ day’s delinquency rate specifically in new car loans.

Possible Economic Issues

Some economic analysts are starting to suspect the subprime auto lending trend could be leading to a bubble. The good news, however, is that auto debt only accounts for 9.2% of household debt which is nowhere near the size of the mortgage industry subprime debacle that caused the financial crisis of 2007. Those who are hurting the most are the auto loan borrowers themselves who risk further hurting their credit and having their vehicles repossessed, but lenders could also be in the crosshairs as well. The U.S. Justice Department has looked into lending practices in the auto loan sector in the past and may see fit to lobby for increased regulations. Additionally, if late payments and defaults continue to rise many auto loan lenders may be out of business.

If you are currently struggling with making your monthly auto loan payment and are at risk of repossession, contact  a Rocklin CA bankruptcy attorney immediately. If you qualify for Chapter 7 or Chapter 13 bankruptcy, you can stop collection attempts and repossessions and may even be able to reduce your total payment through a process known as “cramming down”.

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