“Fight Against Stupidity And Bureaucracy”
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We had it with the real estate market. Billions of dollars being lent to people who obviously couldn’t afford it.
We saw the trouble, hardship, misery and financial woes that were caused as credit dried up, real estate prices began to tumble, and bankruptcies and foreclosures increased.
And we know the damage it did to the economy when irresponsible banks and other lenders went bust and almost brought down the entire financial system.
Smart people would learn from such a situation.
Smart people would never contemplate doing such a thing again.
But despite what they would like to have you believe, bankers are not smart people. They’re dumb and they are greedy, a deadly combination.
As a result of the financial crisis millions of Americans (and people in other countries too) have been left with poor credit scores. Yet remarkably they are now able to easily obtain auto loans from used-car dealers, including some who fabricate or ignore borrowers’ abilities to repay. Even if you are bankrupt or living only on social security, banks like Wells Fargo will lend you thousands of dollars to buy a used car.
It’s called the new sub-prime boom, because the lack of caution resembles the frenzied sub-prime mortgage market before its collapse. And it is already bringing misery to many people who have been suckered into taking out loans that they clearly could not afford.
Worse than that, these sub-prime auto loans often come with terms that take advantage of the most desperate, least financially sophisticated customers, with interest rates that can exceed 20 percent. And many of the loans can be at least twice the value of the second hand cars they are being used to purchase!
This creates a vicious circle for some borrowers, who still owe money on a car that they are trading in when they purchase another one, meaning that the former debt is rolled over into the new loan and they end up, not just paying too much for their current car, but also continue to pay off the loan on their previous car that they don’t even have!
This is the way loan sharks operate. Eventually you end up borrowing your own money and paying them interest for the privilege!
This surge in sub-prime auto lending is being driven by some of the same dynamics that were at work in sub-prime mortgages. There is a veritable deluge of money pouring into sub-prime autos, as the high rates and steady profits of the loans attract investors.
And just as Wall Street stoked the boom in mortgages, some of the nation’s biggest banks and private equity firms are now feeding the growth in sub-prime auto loans by investing in lenders and making money available for loans.
To quote some of the figures, auto loans to people with bad credit have risen more than 130 percent in the five years since the immediate aftermath of the financial crisis, with roughly one in four new auto loans last year going to borrowers considered sub-prime, that is, people with credit scores at or below 640. Wells Fargo, mentioned earlier, made $7.8 billion in auto loans in the second quarter of this year, up 9 percent from a year earlier, and has at least $50 billion in auto loans on its books.
Even worse, as was the case with sub-prime mortgages before the financial crisis, many sub-prime auto loans are being bundled up into complex bonds and sold as securities by banks to insurance companies, mutual funds and public pension funds. They are all scrambling for these, which in turn creates ever-greater demand for loans, and leads to the banks issuing more and more sub-prime credit.
Unbelievably it’s the same crooks doing exactly the same thing, including using incorrect information about borrowers’ income and employment, so that people who had lost their jobs, or were bankrupt, or living on Social Security, could qualify for loans that they could never afford.
Admittedly, the size of the sub-prime auto loan market is only a tiny fraction of the sub-prime mortgage market at its peak, and its implosion would not have the same far-reaching consequences.
For the banks the investors silly enough to buy their bonds, that is.
But the misery is just as great for the people who are suckered into accepting credit they cannot afford.
Illegal it may not be, but immoral it certainly is.
Political leaders who sit astride high horses and purport to be working on behalf of the ordinary people should be doing something about it.
But, as I’ve said before, don’t hold your breath!
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fasab 
Good news is that some of the small banks never got caught up in the rat race the first time, thus won’t this time …. but I don’t trust the the biggest banks.
Thanks for the comment. Yes the smaller banks were a lot more cautious. We need more of them and less of the giants. What a pity the biggest banks weren’t allowed to go under!
i hate to think about the economic consequences of letting them go under, but I continue to proclaim bring back Glass-Steagel!
Yes, no doubt about it that legislation is required to curtail the big banks. As for the economic consequences of allowing them to go under – they would have been replaced and the money given to them that they gambled away and used on bonuses would have been better spent elsewhere.
Over time, no doubt replacement … but the question is how much would we suffer in the short term.
Some of us have been suffering for the past few years 😦
… and in my opinion, we would have suffered more with a lack of a bailout.
It’s not the bailout part that was wrong, it was giving it to the banks who promised to use it to help small businesses etc and instead gambled the money away trying to make more for themselves that was wrong. If a thief steals your money you don’t give him more.
I understand .. .hence the return to Glass-Steagel.
Wonderful article. Well written and well aligned. It was very interesting to go through and I cleared all my doubts about getting a loan with bad credit.
Very nice comment, thank you very much. Glad it was useful in your decision making.
Banks and credit unions do not give high risk auto loans, you have to go to licensed dealers that work with sub-prime lenders. The rates and fees can be costly, consumers need to be smart and make sure they understand all the terms and that they can afford it before they agree. For some, it is the only way they can purchase a car and get back on track. It’s a mixed bag and it’s up to the consumer not to be taken.
Hi, thanks for stopping by my blog and for your comment.
You are of course quite correct in that the ultimate buying decision lies with the consumer, whether it’s a car loan or something else – caveat emptor/let the buyer beware and all that. But does that make it morally right, and should we side with people who deliberately set out to exploit those who aren’t smart enough to know when they are being offered outrageous loan terms?
There’s nothing wrong with turning a healthy profit and making money, but there are a lot cleaner ways of doing it.