Remember that time that loans were being handed out like hotcakes to subprime borrowers, thus triggering one of the worst financial crises in human history, back in 2008? No? Neither do I! That's why it's great news to hear that loans are being handed out to subprime borrowers, again.
Alright, in case you *seriously* forgot what the hell happened in 2008, here it is in a really, really small nutshell. (Seriously, I'm about to not do it justice, to spare you at least 5000 words, but if you're curious watch this excellent video). Financial institutions loaned money to people who couldn't afford the loan, and often financial institutions knew those people couldn't afford the loan. When the borrowers couldn't afford to pay those loans back, it set off an exploding chain reaction of financial awfulness, eventually bringing down those financial institutions, which were so large that their very collapse threatened to destroy the entire global economy.
Like I said, super simple stuff, not threatening at all, and also, go watch that video. You'll end up coming out much smarter.
Anyways, you would think that sort of collapse would teach everyone a lesson, and we'd all go on in the world knowing just a little bit more than we knew then. It would all be brought to you by the letter D, for Don't Screw This Up Again, Even Though There Are No Real Consequences Ever And No One Went To Jail.
So, of course, because this is how the universe works, nobody learned anything, and subprime loans are starting to make a comeback, under "carefully controlled conditions," and you know they're careful, because a bank said that, and banks never lie about anything.
And there's even more good news, for fans of subprime loans. Because they're not restricted to just houses.
They're now being given out to people who want cars. Used cars, according to the New York Times:
This is the face of the new subprime boom. Mr. Durham is one of millions of Americans with shoddy credit who are easily obtaining auto loans from used-car dealers, including some who fabricate or ignore borrowers' abilities to repay. The loans often come with terms that take advantage of the most desperate, least financially sophisticated customers. The surge in lending and the lack of caution resemble the frenzied subprime mortgage market before its implosion set off the 2008 financial crisis.
Auto loans to people with tarnished 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 subprime — people with credit scores at or below 640.
The investigation by the Times found that interest rates on these subprime loans can exceed 23%, the amount of money being given to borrowers is often twice the amount of what those cars are actually worth, loan officers are fabricating information on applications without the knowledge of the applicants to make sure they'll be approved no matter what, loans are often handed out to recent immigrants who aren't fluent in English and haven't been able to access a translator for the loan documents, and that they're being bundled up in nice, neat packages to sell to other financial institutions.
Almost exactly like all those other subprime loans, pre-Great Recession. We're doing good, so far.
But what's better, is that even if the person trying to get a loan sees how awful it all is, and tries to back out, horrifically predatory lenders start doing all sorts of criminal things, like threatening to keep the borrowers' down payment if they don't sign the contract:
In their role as matchmaker between borrowers and lenders, used-car dealers wield tremendous power. They make the pitch to customers, including many troubled borrowers who often believe that their options are limited. And the dealers outline the terms and rates of the loans.
In interviews, more than 40 low-income borrowers described how they were worn down by used car dealers who kept them in suspense for hours before disclosing whether they even qualified for a loan. The seemingly interminable wait, the borrowers said, left them with the impression that the loan — no matter how onerous the terms — was their only chance.
The loans also came with other costs, according to interviews and an examination of the loan documents, including add-on products like unusual insurance policies. In many cases, the examination by The Times found, borrowers ended up shouldering loans that far exceeded the resale value of the car.
Of course, the dealership industry says that these practices are the results of a few rogue actors, and they are Definitely In No Way representative of industry-wide standards. Despite the fact that so many people are paying for loans that are worth more than the cars themselves, like one woman that the Times found who was also paying for a life insurance policy – yes, a life insurance policy, on her used car loan – that was supposed to keep her payments up-to-date, just in case she died.
And furthermore, all those subprime loans are being bought up like they're covered in nothing but the finest golden tinsel.
This whole financial catastrophe in the making can never go wrong.
Photo credit: jbolles