Both lenders and borrowers have benefited from subprime auto loans in the past. However, as time moves forward, subprime auto lending is posing more risks to lenders and borrowers alike. As a financial professional, you need to stay up-to-date with these risks in order to provide your clients with the best advice. You need to offer more than just information on how to build business credit. Consider your other customers. If you receive a client who took out a subprime auto loan, you need to know how to prevent downfalls. The same goes for clients who are lenders themselves. In this post, you will learn the subprime auto lending risks creating crisis.
Rising Interest Rates
One factor adding to the subprime auto lending crisis is rising interest rates. Rising interest rates pose risks for lenders and borrowers. Since subprime auto lending adheres to the needs of individuals with poor credit scores, a high interest rate poses a threat to borrowers. If a borrower cannot pay off their loan because the interest rate is too high, they will only worsen their credit score. Because of this, less individuals are taking out subprime auto loans. As a result, lenders falter. They receive less business when less borrowers apply for loans. Thus, rising interest rates add to the subprime auto lending crisis.
Another factor to recognize as a threat is misreported losses. If you gain a client who is considering lending subprime auto loans to borrowers with poor credit, explain this risk to them. Some car finance companies unfortunately misreport losses from loans gone bad. As a result, lenders suffer. Fraud is a serious risk that is present in all financial situations. Ensure that your clients understand this risk. Then, you will provide them with all of the information they need to lend safely.
Used Car Depreciation
Used car depreciation acts as a subprime auto lending risk as well. Most potential car buyers who take out subprime auto loans are not in good financial situations. Thus, many of them opt for used cars over the newer, more expensive ones. If used cars are depreciating and new car prices are increasing, borrowers have no choice but to take out a larger loan for a new car. As a result, they have to pay more money back to lenders. If they are unable to do so, their credit scores drop further. Then, their financial situation worsens. They are more likely to receive a loan application rejection in their future endeavors. Offer your clients this insight to assist them in making an informed decision about subprime auto lending.
As sales decrease, risks rise revolving around subprime auto lending. Up until the summer of 2018, automotive sales were increasing. In the summer of 2018, sales took a dip and have not risen since. Lenders cannot profit off of subprime auto lending if borrowers are not looking to purchase vehicles. Since new car prices are increasing and used cars’ values are depreciating, one can assume that sales will continue decreasing. Thus, subprime auto lenders might need to find other cash flow sources due to this risk.
Finally, explain the subprime loan bundling risk to your borrowing clients. Many clients take out subprime auto loans without considering the possibility of their lender bundling. When bundling occurs, subprime auto loans are sold to investors. As a result, borrowers’ lenders change. Many times, this change creates issues for borrowers. Their payments end up being late or, worse, the correct lenders do not receive them. Then, payments are deemed “missed”. Errors also occur in crediting payments. These mistakes will increase the complexity of borrowers’ financial situations and make it more difficult for them to fix poor credit scores. To ensure that your clients refrain from falling into these traps, explain the details of loan bundling to them.
Although lenders and borrowers succeeded with subprime auto loans in the past, times have changed. Now, such loans pose many risks to both parties. As interest rates rise, borrowers’ risks rise and, as a result, they are taking out less loans. Companies misreport losses and lenders receive unfair treatment. Borrowers worsen their financial situations by purchasing new cars because used cars are depreciating. Car sales have been decreasing, which leaves lenders with decreased profits. Lastly, the possibility of loan bundling threatens borrowers. These are all subprime auto lending risks that are creating crisis for your clients.