Subprime lending makes a comeback

“Even I wouldn’t make a loan to me at this point,” said Ms. Annette Alejandro, an unemployed 46-year old Brooklyn resident who has just recently emerged from bankruptcy. Even with her bad credit, Ms. Alejandro is being bombarded with credit card and auto loan offers. Once again it seems, credit card companies, lenders, and banks are moving into subprime lending territory. After the 2008 crisis, subprime lending became taboo, but it is once again on the rise. Although Americans have been paying off their credit cards and loans and reducing their debt, there are still those who can easily fall victim to predatory lending and offers that seem too good to be true.  Financial institutions insist that they have learned from the mistakes of the past and are ready to begin expanding. To ensure that lenders don’t miss out on any potential customers, they have been developing new advertising campaigns to specifically target those with damaged credit. For example, Capital One recently released a credit card that is aimed at borrowers with bad credit that allows them to lower their interest rates after making timely payments for one year. Credit card lenders extended $12.5 billion in subprime loans last year, which is almost 55% more than in 2010, (although well below 2007) and gave out 1.1 million new cards to borrowers with damaged credit. In addition to credit cards, auto loans, which were left mostly untouched by the new lending regulations, have become particularly popular for lenders. The chief credit and risk officer at GM Financial said that he expects “subprime auto loans to continue to grow,” and that “unlike mortgage lenders, auto lenders understand how to manage risk.” Moody’s Analytics contend that the market could be growing too fast and that lenders are unwise to extend loans to such risky borrowers.

Posted by: Devon Thorsell

Source: NY Times

Photo credit: Visa, Master Card credit card by flickr user leeander


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