Published On: Thu, Sep 21st, 2017

Heading For A Financial Crash: Car Loans

Heading For A Financial Crash: Car Loans

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The financial crash of 2007/8 has left a shadow over society that still lingers nearly a decade on. The worldwide recession that resulted from the crash brought about political turmoil, a lower standard of living, and a lot of pain for everyday households.

However, given the scale of the crash, you would think — hope — that everyone in the financial industry has learned their lesson. You would think that all companies would have tightened their belts, especially when it comes to lending to customers with poor financial histories. That, after all, is what caused the last crash; subprime lending.

Sadly, when the damage from the last financial crash is still being felt, it doesn’t seem that much has been learned from 2007/8 at all. The only difference is that the subprime lending is no longer a mortgage crisis; it’s a car loan crisis.

 

What’s Happening?

Due in no small part to the wage stagnation that is being felt around the world, people who want to buy cars are unable to do so. This means they have to turn to borrowing to be able to buy a car. Where cars were once very much a luxury item, in the modern world they are effectively a necessity. Many jobs require a commute that isn’t available via public transport, so for some, a car is something they can’t be without. If they can’t afford to borrow money for a car with safe, credible lenders, they turn to the subprime lenders.

 

These lenders are much like the mortgage providers that got the ball rolling on the last financial crash. They are lending money to people who cannot afford it, without correctly checking that the repayments are affordable. As you’d expect, the companies are also charging extortionate interest rates for access to these loans.

While some customers will manage their repayments fine, others… won’t. If they find themselves in financial difficulties or discover their chosen car needs extensive auto repair, then they won’t have the money to fix it. The latter may sound like it’s something the lender should be responsible for, but that’s not always the case. Often, the lender is just providing a loan to buy a car; they take no responsibility for the car itself. If the car the customer then buys isn’t fit for use, it’s the customer who has to pay to get it back on the road. When they don’t have the money to pay for the repairs, they find themselves stuck paying a loan for a vehicle that they can’t even drive — and they weren’t in a good financial situation to begin with.

 

So Is There A Crash Looming?

It’s very hard to say. The subprime mortgage crisis was caused by thousands of people defaulting on their mortgages; the same could definitely happen in the car loan industry. However, it’s worth remembering that car loans are usually for far smaller amounts than mortgages. This means that lenders might be able to swallow any losses through customers defaulting, thus ensuring there won’t be another crash — or at least one of the same magnitude as 2007/8. For the moment, it’s a wait-and-see situation.

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