Years ago, there was a subprime mortgage boom. Banks and other financiers were increasingly offering loans to people with checkered or undeveloped credit histories. This helped to fuel a housing boom, which ultimately crashed, burned and led the balance of the U.S. economy into what was arguably its deepest post World War II recession.
While the subprime mortgage boom is over, a similar trend is emerging in the world of auto loans. According to the New York Times, auto loans to people with tarnished credit rose more than 130 percent during a recent 5-year period. Roughly 1 in 4 new auto loans last year went to borrowers considered subprime, meaning that they had credit scores at or below 640. The growth of subprime auto loan making is being driven by some of the same forces behind the subprime mortgage boom.
A wave of money is pouring into the subprime auto market as high interest rates attract investors. Some subprime auto leans come with interest rates that can exceed 23 percent. That said, the subprime auto loan market is not nearly large enough to help trigger the type of financial collapse that America experienced in 2008.