DENVER – Trends have been noted in auto lending that look an awful lot like the mortgage market prior to the meltdown that resulted in the recession.
Those trends are featured in a new report from the Center for Responsible Lending, which focuses on the growth of subprime lending, or loans to people with poor credit scores.
Chris Kukla, senior vice president of the center, says there are several issues at play – cars are more expensive and wages are stagnant. He also says dealers are rewarded for issuing loans at inflated interest rates in an undisclosed practice called “dealer markup.”
“You’re already underwater by 40 percent to half the minute you drive off the lot, but you’ve also got a depreciating asset,” he says. “Most people are going to be underwater the entire time they’re in the loan.”
Kukla says subprime loans are not only dangerous to a family’s economic health, but in the long run can hurt car dealers as well, because consumers who become upside-down in long-term loans aren’t repeat customers.
The report found the use of subprime loans for cars has grown quite suddenly, and there has been a corresponding uptick in car and truck repossessions. Kukla says buyers may think they have protections, but the industry has been aggressive in averting regulation – especially at the state level.
“This is an area where there’s been very little, if any, real consumer protections put in place, when you compare it to any other lending market,” says Kukla.
Those against regulations say stricter rules could make it tougher for people with sub-par credit to find auto loans with payments that work within their budget.