4 Reasons Subprime Loans Are Back (For Cars) | WAMU 88.5 - American University Radio
Filed Under:

4 Reasons Subprime Loans Are Back (For Cars)

Play associated audio

"I wasn't even looking for a new car," Katrece Poole told me. But two years ago, a local car dealership running a direct-mail ad campaign sent her a letter saying they were making loans to lots of buyers. So she went down to the dealership, filled out the paperwork, and got approved — despite the fact that her car had been repossessed in 2005 because she missed payments.

Subprime car loans are a big deal these days. More than a third of auto loans are now going to subprime buyers, according to one estimate. Here are four reasons:

1. Lenders can charge high interest rates on subprime loans (as high as 25 percent in some cases).

2. Default rates are low. People often need their cars to get to work, so they prioritize making their car payments.

3. Used car prices are at near historic highs. So when people do default, lenders can often get all of their money back (and, in some cases, more) by repossessing the car and selling it at auction.

4. Lenders can package their loans and sell them to Wall Street, where they are broken into pieces and sold off to investors.

Breaking loans into pieces and selling them off to investors may sound familiar to anyone who watched the housing boom and bust. But auto loans are unlikely to bring down the global economy — they're a tenth the size of the mortgage market, and even during the recession they performed pretty well.

There are worries about subprime borrowers getting trapped in loans they can't afford to pay back. But as more lenders compete for borrowers' business, rates may fall. In fact, Katrece Poole's credit union recently helped refinance her original subprime loan, cutting her interest rate in half.

Copyright 2013 NPR. To see more, visit http://www.npr.org/.

NPR

After A Ho-Hum Summer, Hollywood Ramps Up For Fall

Until Guardians of the Galaxy came along, this year's box office figures were the worst in years. But critic Bob Mondello says there are bound to be some fall films that get pulses pounding again.
NPR

These 5 Crops Are Still Hand-Harvested, And It's Hard Work

Saffron, vanilla, palm oil, cacao and cottonseed oil are still picked by hand in some parts of the world. Sometimes that manual labor shows up in the price of the food; sometimes it doesn't.
NPR

Guns Boom In 2014 Campaign Ads

Ads with candidates shooting guns are proliferating this year. It can all be traced back to Sen. Joe Manchin's famed 2010 spot "Dead Aim."
NPR

Why Do We Blindly Sign Terms Of Service Agreements?

Audie Cornish talks with University of Chicago Law School professor Omri Ben-Shahar about terms of service agreements for software and websites.

Leave a Comment

Help keep the conversation civil. Please refer to our Terms of Use and Code of Conduct before posting your comments.