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Report: Auto Financing Needs a Tune-Up

The subprime auto-financing market has seen strong growth over the past couple of years. The trend was mentioned as a risk to Arkansas' economy at a recent summit. Credit: Deborah C. Smith
The subprime auto-financing market has seen strong growth over the past couple of years. The trend was mentioned as a risk to Arkansas' economy at a recent summit. Credit: Deborah C. Smith
February 4, 2015

FAYETTEVILLE, Ark. - Similarities have been found in auto lending that look an awful lot like what happened in the mortgage market prior to the meltdown.

Those trends are featured in a new report from the Center for Responsible Lending. Chris Kukla, the center's senior vice president, explained that several issues are at play; cars are more expensive and wages are stagnant. Plus, he said, dealers are rewarded for issuing loans at higher rates, despite what the borrower qualifies for - and they can keep those details secret.

"You're already underwater by 40 percent half the minute you drive off the lot, but you've also got a depreciating asset," he said. "Most people, they're going to be underwater the entire time that they're in the loan."

Subprime auto loans were mentioned as a risk to the state's economy at the annual Business Forecast Lunch in Fayetteville last weekend. Kukla contended that the practices aren't only dangerous to family economic health but also hurt car dealers as well, because consumers upside-down in long-term loans aren't repeat customers.

The report found the value of subprime loans has grown quite suddenly, and there's been an uptick in car and truck repossessions. Kukla said consumers may think they have protections, but the industry has been aggressive in averting regulation - especially at the state level.

"This is an area where there has been very little, if any, real consumer protections put in place, when you compare it to any other lending market," he said.

Those against regulations say stricter rules could make it tougher to help people with sub-par credit find auto loans with monthly payments that can work within their budgets.

The report, "Reckless Driving: Implications of Recent Subprime Auto Finance Growth," is online at responsiblelending.org.

Deborah Courson Smith/Deb Courson Smith, Public News Service - AR