Disadvantages of Subprime Auto Loans - Special Academic Support

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One should not seek out promoting subprime loans knowing that he or she will charge borrowers with higher fees, which are unjustified. The main reason is that such borrowers are undesirable due to their higher chance of defaulting. In other words, the target group is risky for the company due to their overall inability to pay the money back. In addition, such an approach generates a subprime auto finance bubble similar to the mortgage bubble of the 2008 financial crisis. This is due to the predatory lending aspect of subprime auto loans, where unsophisticated and poorly educated individuals are specifically sought out and abused due to their lack of other options. Therefore, subprime auto loans are unethical and dangerous for both the company and borrowers and they contribute to the creation of a bubble that can burst and lead to a major crisis.

Subprime auto loans specifically target individuals who have limited access to a wide range of more secure and sound financial services. By setting the strategy of the company to focus on the provision of such financial services, the organization puts both clients and itself at risk. A study suggests that unmarried borrowers with lower income are more significantly more likely to default (Ghulam and Hill 49). In addition, the contributing factors are effective interest rates, loan-to-value, and the term of the loan agreement (Ghulam and Hill 60). Therefore, the target group cannot be considered as a sustainable source of long-term income. Actively promoting subprime loans to such individuals will only benefit those who are earning commission fees from these deals. In other words, it is unethical to conduct such an activity where the sole beneficiary are intermediaries.

It is important to note that any small activity has an echoing effect on the grander scale. It is stated that there is a high risk of the subprime auto loan bubble bursting similarly to the 2008 financial crisis (Schmidt 1345). The cumulative effect of the industrys collective malpractice can lead to a severe crisis unless the regulators integrate some form of legislative instrument. The researcher suggests that the subprime auto loan market needs the ability-to-repay rule, which was incorporated into the mortgage loan market after the crisis. In addition, the company is putting itself at a major risk because there is a 40 to 60% default rate among the target group compared to an average of 7% (Ghulam et al. 1). Therefore, the negative consequences will be experienced by both the company and its clients. It will also contribute to the formation of the larger bubble in the industry, making it more likely to burst. Such activity can only be considered as a short-term gain for commission receivers, but in the long run, it is unsustainable because the borrowers will default, and the company will need to lay off its employees. In addition, there is a high chance that the bursting of the bubble will cause another financial crisis.

In conclusion, there are both logical and ethical reasons to stop the given malpractice of predatory lending. Firstly, the subprime auto loan market is not properly regulated, which makes it possible to create a bubble that can burst and impact the entire economy. Secondly, such lending is unsustainable due to the overall prevalence of higher risks. In other words, short-term gains in terms of commission do not justify the potential losses in the future. Thirdly, it is unethical to knowingly seek out borrowers with a higher default rate and fewer options.

Works Cited

Ghulam, Yaseen, and Sophie Hill. Distinguishing Between Good and Bad Subprime Auto Loans Borrowers: The Role of Demographics, Region and Loan Characteristics. Economics & Finance, vol. 10, no. 4, 2017, pp. 49-62.

Ghulam, Yaseen, et al. The Interaction of Borrower and Loan Characteristics in Predicting Risks of Subprime Automobile Loans. Risks, vol. 6, no. 3, 2018, pp. 1-21.

Schmidt, Andrew. Pump the Brakes: What Financial Regulators Should Consider in Trying to Prevent a Subprime Auto Loan Bubble. California Law Review, vol. 107, 2019, pp. 1345-1351.

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