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The market for subprime loans is “frothy” once again, Bloomberg News reports.
But instead of home loans, subprime borrowing is booming in the car business, and buoying U.S. car sales.
Bloomberg’s Marty Schenker joins Here & Now’s Meghna Chakrabarti to explain.
MEGHNA CHAKRABARTI, HOST:
From NPR and WBUR Boston, I'm Meghna Chakrabarti. It's HERE AND NOW.
Want to buy a new car but your credit rating isn't so great? Well, these days, car dealers might tell you, no problem. The Federal Reserve stimulus policy of keeping interest rates low, low, low is making it easier for people with less than stellar credit to buy cars they may not be able to afford. Marty Schenker is the executive editor for news at Bloomberg and he's with us to discuss. Hi, Marty.
MARTY SCHENKER: Hi. How you doing?
CHAKRABARTI: I'm doing great. So how does this work? I, like, sort of venture into my local Chevy dealer and I say, I want a $30,000 car, but I've got, like, a credit rating of 420? No problem. Is that how easy it is?
SCHENKER: That's basically it, because the Federal Reserve is keeping interest rates so low, and it's quite easy for someone with really poor credit to walk out - or rather drive out with a car.
CHAKRABARTI: OK. So, but how did it - I mean, is it such that do we need to show evidence of income, I.D., other assets? You see what I'm getting at?
SCHENKER: Well, in the examples that we discovered during our reporting, I mean, all they, really, are asking for is a couple of pay stubs, proof of - that you're actually employed, and off you go.
CHAKRABARTI: OK. So these are basically subprime car loans, right?
SCHENKER: That's what they're called.
CHAKRABARTI: OK. So the reason why I was asking all that thing about evidence of income that you have to show, is that it sounds really familiar in terms of what we went through with the housing market. Is it the same pattern of lending that got us into all that trouble with subprime mortgages?
SCHENKER: It is eerily familiar, but there are significant differences, and that has to do with how people view their cars. And the studies have shown that people will pay their car loans off, in some cases, before they'll even pay their mortgages, because you can always sleep in your car.
CHAKRABARTI: You can...
CHAKRABARTI: You know, you caught me off-guard there for a second because I was thinking, oh, well, that's a good thing. But then again, it's not a bad - it's not a good thing to say, hey, sleeping in your car is a better option. But I'm curious, though, are we seeing the same pattern of, for example, predatory lending, that got a lot of people in trouble with the housing market? Are we seeing that in auto loans?
SCHENKER: I - the Federal Reserve has said that they don't see any evidence of predatory lending. It must be said, though, that if you're a subprime borrower, you're going to pay high rates than someone with good credit. So some of those auto loans average in a - 10 percent. And if you're paying more than three percent on a loan, you're obviously not a good credit.
CHAKRABARTI: All right. So who are the banks or the financing companies that are issuing these loans?
SCHENKER: Well, it's the financing arms of the companies themselves. Chrysler does a lot of it, GM does a lot of it. And what the banks who are providing the financing due is that they package these loans into financial instruments that they then sell to the investors. And the banks, actually, are pretty well-protected.
CHAKRABARTI: OK. Now I imagine, Marty, that for people who find themselves in the unfortunate situation of due to their bad credit and other financial issues can't pay off their car loans, for example, cars are pretty easy to value, so a company is just, you know, seizing them back and reselling them?
SCHENKER: That's what's happening. And - but actually, since the interest rates are so low, people are not delinquent on their car loans. So they aren't having to do it. But if they did, yes, they're easy to value, they're easy to find and they're easy to resell.
CHAKRABARTI: OK. So they're not being delinquent on their loan.
CHAKRABARTI: So, overall, this doesn't sound like a terrible thing?
SCHENKER: No. But, you know, if you think back to 2007 and 2008, that's exactly what people said about subprime borrowing of mortgages. So there are some people out there who are concerned that, eventually, this could come to a bad end.
CHAKRABARTI: Well, we don't want to see a auto loan bubble like we did with the housing market. Marty Schenker, Bloomberg executive editor for news, thanks so much.
SCHENKER: Thanks for having me.
CHAKRABARTI: You're listening to HERE AND NOW. Transcript provided by NPR, Copyright NPR.
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