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Camaro puts aggressive Acura back in its place

100% stock (right down to the paper air filter) 1993 LT1 powered Camaro automatic, out for a cruise after a couple base Dyno pulls, and ran into ...

Car Dependence and the Troubling Rise of Subprime Auto Loans

Since the economic recovery began, lending institutions have actually loosened standards for car loans. The auto finance sector was excluded from regulation by the Consumer Financial Protection Bureau, which was created after the housing crisis to help regulate the consumer banking and credit industry.

Since then, more Americans have chosen to borrow to pay for their cars. About 86 percent of new cars were financed in 2015, up from 80 percent in 2008, according to Tony Dutzik of the Frontier Group , who has been researching the issue. For used cars, the financing rate rose to 55 percent in the second quarter of 2015 — about 7 percentage points higher than in 2010.

Lower-income borrowers account for a large share of the growth in car loans. According to a 2014 New York Times story , subprime auto lending increased 130 percent in the five years following the recession.

Evidence suggests consumers are being stretched thin. Default rates have been climbing. CNN Money reported in March that unpaid subprime car loans are at a 20-year high. As Dimon indicated, this may pose a risk to the broader economy.

Some Lenders Relax Standards Too Much, Dealer Says

Vehicle financing “started off the year with a bang,” says Melinda Zabritski, senior director-automotive financing for credit tracker Experian.

But some industry people worry heightened competition among lenders could blow up in their faces if there’s a surge in car-loan defaults. Others say there’s no need to fret.

Certain lenders are doing questionable things, such as relaxing credit standards to get dealers to steer business their way, says Joe Castle, dealer principal of the Castle Auto Group in Chicago.

The automotive-lending industry went into a deep freeze in 2009, a result of the nationwide financial crisis. But now car lending seems a bit too free flowing, with some aggressive lenders failing to properly vet credit-challenged consumers seeking loans, Castle says.

“What worries me is that I’m seeing lenders waiving stipulations (i.e. proof of employment and residency) on 550 (subprime) credit scores,” he says at a recent American Financial Services Assn. conference.