Anatomy of Bad Credit Auto Financing

March 14th, 2010 by admin

Within the U.S. financial markets, lies a growing industry. Prime lenders that enjoyed exponential growths over the last few decades are now being overshadowed by a booming sub-prime auto market. In simple terms, there are more people now than ever that need to buy a car with bad credit and more companies than ever, are making it happen.

It’s a risky business.

Sub-prime auto loans have a very high rate of default. Delinquincy rates for bad credit auto financing exceeds 20% in some markets. Aggressive lending to consumers that are not able to comfortably afford their car payments are to blame.

The lending requirements are “loose”.

Some sub-prime lenders will approve anyone that has a down payment and an income. Whether that income is derived from employment, social security or a pension seems to be of no importance, so long as there is a demonstrable ability to repay the debt. This leads many to ponder with doubt, the long term viability of some sub-prime auto loan companies that have “loose” requirements for loan approval.

What will the future hold?

Any financial market that lends aggressively putting commissions ahead of reason will certainly have dark days ahead. This has been seen in the housing markets with Freddie Mac and others recently. Will this secondary auto market end up in the same situation? One thing is certain, these are stocks that are climbing rapidly, yet may not be a good long term investment.

Value fluctuations affecting loan amounts…

NADA and Kelley Blue Book have shown fluctuating valuations for used cars over the last couple years. Used car prices come up and down just like the stock market. This had made it difficult for some lenders to have security in the collateral that their loans are based upon. As the fluctuation of valuation has caused insecurity in placing a loan value on a vehicle, many lenders are not advancing the amounts that they have in previous years. Nevertheless, loans for people that have credit troubles are being made everyday.

 

 

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