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Beware the Subprime Auto Loan Bubble

Kevin Faulk Feb. 12, 2015

What Was Your Interest Rate on Your Last Auto Loan?

Sometimes, you can have too many bubbles.

And financial bubbles can hurt a lot of people, as these articles, Next subprime bubble to burst: auto loans” and “Investment Riches Built on Subprime Auto Loans to Poor” explain.

Financial institutions haven’t learned their lessons from the subprime housing bubble. Now they’ve created a new bubble in subprime auto loans. Banks and dealers will find a way to make loans to anyone, no matter how bad their credit. They will boost the interest rate as high as they can, stretch out the payments as long as possible, and even cut the cash price of the vehicle to make the deal go through.

Dealerships will also engage in shenanigans to convince banks to make loans that they should not. They will overstate income on credit reports. They will increase the reported down payment on the contract without actually having the consumer pay more. They will alter the vehicle information to artificially increase its value as collateral.

Over the years it has become commonplace to see interest rates on auto loans in excess of 20%. The next step has become people rolling large amounts of debt on cars that are now worth little into new auto loans. Suddenly, a consumer is paying $700 a month for a $20,000 car.

You can help yourself avoid some really terrible financial situations with these rules of thumb:

  1. First, don’t trade in a car until you’re close to the end of the loan on that car.

  2. Even then, remember that it’s important to make dealerships give you the real value of your trade-in. Don’t simply accept the number they offer you.

  3. If the dealer suggests altering any numbers on your credit application, even if it seems to be in your favor, don’t do it! Check what is entered on your credit application, and don’t let the dealership convince you that it’s okay to exaggerate. Ultimately, this will come back to bite you.

  4. If, after you’ve agreed on a price for the vehicle, the dealer offers to further lower the price to help you qualify for financing, you need to refuse. That’s a glaring sign that you’re buying too much car and are just hurting yourself in the long run.

  5. Finally, just because you can borrow money doesn’t mean you should. The banks are not looking out for your well-being. They want to hook you up to the credit-debt cycle that fuels their profits.

Photo credit: Viktor Hanacek on picjumbo. Apple, the Apple logo and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries.