Subprime lending is an interesting issue, and it’s one I plan on attacking from a lot different angles today. Specifically I’m talking about subprime auto loans. Subprime lending is when creditors approve a loan to someone who is not credit worthy.
It’s easy to want to lay blame in these situations, and most often this blame falls on financial institutions. But I don’t hold the same opinion. I don’t blame financial institutions for the fallout caused by subprime lending, because I blame consumers. Yeah, I know, you’re upset. You are already running through all the reasons why I’m wrong but let me explain myself. You, and only you, are responsible for the financial decisions you make. Just because a financial institution “let you” borrow money doesn’t mean you should have.
When talking about subprime loans it’s almost impossible not to address classism. You want the upgraded house or the nicer car because you feel like someone who makes your income or is in your life stage deserves that house or that car. But the reality is, if you can’t afford it, you can’t afford it. To take it to the extreme, it’s not like I’m out trying to get a subprime jet loan. I can’t afford a jet, I don’t deserve a jet, end of story. There is the argument that these loans are for necessary modes of transportation and shelter, but I believe there are other methods to get what you need.
But that was all a digression, back to the subprime auto loans. You must understand that one man’s debt is another man’s asset. Banks package up these subprime loans and sell them off as asset-backed securities. Yes, the same type that brought down the economy in 2008.
These asset-backed securities are sold as low risk, high yield investments. But the question becomes, are they truly low risk? Last year 29% of these asset-backed securities were comprised of subprime auto loans, which is up 15% from the previous year. Just to show the magnitude of this, 29% is over 100 billion dollars. That’s a lot of money.
So how does this impact you? The same reason why asset-backed securities made up of primarily subprime mortgages impacted you in 2008. It’s possibly the bubble could burst again. But an industry insider disagrees with me, he/she claims they aren’t worried about investing in these securities made up of subprime auto loans because “people can sleep in their car, but they can’t drive their house.” Just think about that statement for a minute. It’s a despicable as you think it is. What this insider is saying is investors aren’t worried about subprime auto loans because people are more likely to pay off their cars (which can be used as transportation to work and temporary housing if necessary) than their homes (which offer no way to get to work).
This is a big topic, one which I cover more in depth in the segment from The Pete the Planner Radio Show below. Take a listen. This is really important information to know and understand.
Your responsibility is to avoid getting a subprime auto loan. Chances are you know if you are a credit risk when applying, but if you don’t you need to educate yourself. This is your responsibility. A bubble is possibly forming in the subprime auto loan industry and it will impact a lot of corporations whose portfolios are tied up in these investments.
This is all crazy, right? I’m appalled and yet extremely fascinated at the same time. Listen below to hear more.
Peter Dunn a.k.a. Pete the Planner® is an award-winning financial mind and a former comedian. He’s a USA TODAY columnist, author of ten books, and is the host of the popular radio show and podcast, The Pete the Planner Show. Pete is considered one of the foremost experts on financial wellness in the world, but he’s just as likely to talk your ear off about bass fishing.