When Henry Ford starting building automobiles in this country he was a revolutionary. He developed interchangeable parts as well as assembly line production. To streamline the process, at first Ford only black cars. It was just easier that way. Another of Ford’s ingenious ideas was to be able to produce a car inexpensively yet pay his workers competitively enough so that they could afford to purchase Ford automobiles, themselves. In a way, Ford was creating his own customers by creating well-paid employees. Things have changed, however. Instead of saving up wages in order to purchase a vehicle, today many Americans use subprime auto loans as a way to acquire a vehicle.

If you have a subprime auto loan, you know it. Subprime auto loans are not like conventional auto loans. For instance, a subprime auto loan quite often picks out the car you are going to buy for you. If you have no money and poor credit, the bank picks out which car you are going to drive. Through a complex algorithm which includes income, credit score, personal expenses, debt calculations, insurance costs, profit models, risk aversion and the like, banks that specialize in subprime loans have found a way to print money for themselves. The question is, are they going to cause another financial disaster?

The Growing Problem Of Subprime Auto Loans : Everyone Is Approved!

Everyone is approved! The catch is that you are not approved for a new car. Generally speaking, there is not enough profit and too much risk in the idea of selling new cars at subprime interest rates. These subprime auto loan interest rates usually start in the low -teens and can run up to the 20% and even 30% brackets. Attaching a 22% interest rate to a new car yields ridiculous payments that a person with poor credit and an average job will simply not be able to service. Here is where used cars enter the equation.

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If a dealer can come across some vehicles that are mid-mileage, about 40,000 to 70,000 miles or so, on the wholesale market, and then find a customer willing to put down cash and sign loan documents that are calculated to yield the maximum allowable profit for the dealership, business is great. Business is so great in fact, that this subprime auto loan business model is much more profitable than trying to sell new cars to people with good credit.

Just as people who have subprime auto loans seldom get to choose the actual vehicle they purchase, they don’t get to negotiate price or loan terms, either. I can tell you from my time working in the auto loan industry that people with cash and good credit can negotiate and choose what they want. In a subprime auto loan situation, where the buyer has a credit score in the mid 500’s or so, everything goes much differently.

Subprime Auto Loan Preliminaries.

A dealer will ask you extensive questions about your finances and personal spending habits. Much more than likely you will be asked to bring W-2’s or tax statements with you. Chances are quite good that they will want to see several past paycheck stubs, too. There will be forms to fill out and a credit check to do. All of this has to be done long before you ever see a car.

Once the numbers are tallied and the fat men have spoken, a maximum figure that you will be allowed to borrow is finally calculated. Here is where the care salesman that handles with subprime auto loans goes to work. www.bloomberg.com

The Growing Problem Of Subprime Auto Loans : A Bubble In Used Car Prices?

Instead of showing the customer a few cars that may fit into the newly defined budget, the salesman scours the inventory for the cheapest car that best meets the loan minimum standards as far as age, mileage etc. This formula guarantees the largest profit for the bank, dealership, and salesperson. It also does little to actually help the buyer acquire a decent car at a fair price. In the end, this powerful financial market also creates a vacuous market for cars that are past their prime and were seldom great models in the first place.

The sale concludes (maybe) when the customer is introduced to the car and the initial loan terms at the same time. It is really a take it or leave it situation. And, since the buyer is usually in need of a vehicle and they have spent several hours or even days providing preliminary financial information, they take it.

The Growing Problem Of Subprime Auto Loans : Own Gold As A Hedge.

Part of the job of a senior analyst at ITM Trading is to be able to recognize and explain financial threats to clients. The bubble that is forming in the subprime auto loan market is also forming a bubble in used car prices. When these bubbles pop, the financial worlds will not cease to exist, but many lives, futures, and financial portfolios will suffer greatly.

More troublesome, perhaps, is that our economic system is a system of bubbles, crashes, and economic pain. It is also the job of an ITM Trading senior analyst to show you how hard asset currencies such as gold and silver can help protect your financial portfolios from bubbles and shady car loans.

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