Wednesday, March 18, 2015

Buyers beware: Your car loans may lead to the next financial bust


The New York Times is reporting that many consumers are being lured to sign up for car loans they can't afford. What's worse, is that these loans are being bundled up into high risk investments and sold to the public, very much like what happened with the real estate bust of 2008.

An investigation found that many of the borrowers are not providing the right addresses on their loans, which makes tracing back default payments to the respective car owners that much difficult. The borrowers that were interviewed in the article claim that car sales representatives were inflating the terms and conditions of the loans, misleading them into believing they can afford payments that are beyond their means. One such borrower did not even have a steady income and was convinced to buy a BMW for her daughter.

This has large implications, since these loans are being sold as investments to unsuspecting investors. Who, by the way, are just relying on the words of the companies selling them what should be assets with good returns. As what happened with the real estate bust, these investments will start tumbling as soon as the rate of borrower default rises.

According to the New York Times:

Led by companies like Santander Consumer; GM Financial, General Motors’ lending unit; and Exeter Finance, an arm of the Blackstone Group, such securitizations have grown 302 percent, to $20.2 billion since 2010, according to Thomson Reuters IFR Markets. And even as rising delinquencies and other signs of stress in the market emerged last year, subprime securitizations increased 28 percent from 2013.

To avoid entering into such a risky loan, know that you have a right to examine the terms of loans on your own time. You also have a right to shop around for better rates and terms as well. Before signing on the dotted line, do your own research. Multiple loan calculators are available online to estimate the type of loan you can afford. One such site is bankrate.com. If you believe you are being mislead by anyone, visit the Securities and Exchange Commission website at www.sec.gov and submit your concerns or complaints there.

Link to the article: http://dealbook.nytimes.com/2015/01/26/investment-riches-built-on-auto-loans-to-poor/?ref=business

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