Automobiles are causing the biggest boom in subprime lending since the 2008 financial crisis…

The New York Times reports “subprime” lending—loans made to individuals with higher risk of defaulting on their repayment—now accounts for almost one-third of all car purchases. Even worse, subprime lending’s fastest growth is in “title loans”—short-term loans that use cars as collateral. These loans carry effective interest rates between 80-500%. The Federal Deposit Insurance Corporation (FDIC) indicates more than 1.1 million American households took out auto title loans in 2013.



The Times article goes on to say lenders base their loans on the value of the car, not the borrower’s ability to repay it. This results in borrowers “rolling over” their loans—often every month—just to try to keep up with the interest payments. One title loan lender, “Title Max,” disclosed its average customer renewed their loan eight times. Of course, each new loan has expensive origination fees… and most borrowers wind up defaulting over time. The lenders then repossess the cars.

  Ten years ago, subprime lending in the housing market helped inflate an enormous real estate bubble. Instead of using their cars for collateral, millions of American families borrowed against their homes’ inflated asset prices. Just as today, banks felt confident lending against these assets… regardless of the borrowers’ ability to pay back their loans. But when cheap money ran out, the bubble burst… asset prices collapsed… and banks soon learned their loans “secured” by the borrowers’ houses were an illusion. It led to a system-wide credit contraction. That ushered in the 2008 financial crisis and the “Great Recession.”

Today’s title loan subprime environment shares some similarities with last decade’s. That should cause any investor to take caution. But since cars are depreciating assets, market forces will help keep asset values from skyrocketing in the way houses did. This will reduce the likelihood of another credit crisis.

Bottom line: While this trend is disturbing—and those unfortunate enough to take out title loans will feel a world of pain—subprime auto lending does not represent a systemic threat in the way subprime housing lending did. But if you think you’ll ever need to borrow against your assets… don’t do it before reading our next item. There’s a way to do so that’s 100% private… allows you to set your own repayment terms… and lets the assets you’re borrowing against continue to compound their returns over time.