The High Demand for Subprime Credit Loans
Ever since the economy had a decline, bad credit loans have been on the rise. This has been factored by the increase in the auto loans and new companies offering more credit. Between January and November 2014, 0.04% of the credit cards, installment loans with monthly payments, personal borrowings, and auto loans were directed to the subprime customers. This is a report carried out in the US, and it amounted to over 50 million customer cards and loans that resulted in around $190 billion. The subprime loans covered 41% of the customers that borrow loans outside of mortgages.
Who is a Subprime Borrower?
A subprime borrower is an individual that has a credit score of less than 640, rated on a scale of 850. This implies that this type of borrower is not really below the average, and he is also not at a safe level. These customers have to obtain payday/cash advance loans that boasts higher interest rates. The interest of the lenders in the customers that were adversely affected by the financial crisis showed a comparative state of the economy. This also showed the desires of the firms to be willing to take risks when the extremely low-interest rates are pressing down the profits. With this, the Americans are ready to take up more debts.
Non-bank Lenders to the Subprime Borrowers
Several non-bank lenders have established, and they are willing to roll out different types of financing, including the personal loans, to the subprime borrowers. These non-bank lenders encounter less supervisory process compared to the major banks. Most of the lenders are funded by some private investors, the Silicon Valley capitalists, and some hedge funds that want to get higher returns.
The nonbank lenders that cater to the subprime borrowers claim that they are looking for ways to complete the space left by the major banks. The large banks have limited their activity in the risky lending. This has been as a result of the bigger regulatory process that they must go through.
Subprime and Mortgages
It is expected that there will be an increase of mortgages as a subprime loan. The mortgages were the senior loans that were on the rise in 2008. They are the major contributors of the financial meltdown in that year. The mortgage lenders aim at the borrowers that have solid credit. Since 2009, an annual subprime mortgage of $4 billion has been given out. This has reduced from $625 that was given out in 2005.
Subprime Credit Loans and the Economy
It is believed that an increase in the subprime loans might greatly affect the US economy. The ease of financing has boosted the sale of automobiles in the US. This has totaled to about 16.5 million cars and trucks that have been sold in 2014 alone. Most of the cars have been sold through loans and financing.
The subprime credit might have a positive effect on the borrowers and the economy as well, according to the observation of some specialists. With this type of bad credit loans, it allows people to develop and advance. Conversely, others believe that it might be good for a short while, but it can expose the country to some negative effects. It is believed that the credits can affect the economy badly.
The subprime borrowers that pay higher interest rates on their shorter term loans can end up missing the payment periods when the economy is in a meltdown. The growth of this type of loan can originate from the government of America.
A lot of lenders have said that they are offering the loans to the borrowers that are at the top of the subprime credit score rating. Also, they are reviewing the history of the other borrowers. The history will be viewed in terms of the income and the transactions in the bank account.
The Subprime Auto Loans
Car loans are among the top in the subprime lending. They contributed to about $129.5 billion in 2014, from January to November. Even though it has declined in the last three years, the negligence rates of the car loans are on the rise. Some consumer advocates and economists are worried that the practices of auto-loaning are risky, and it can lead to more defaults on the loans.
As more nonbank lenders are financing the subprime borrowers, some economists claim that it is a risky practice. There is high demand, and more institution are enjoying majorly from it.