US face growing hidden debt trap, echoing 2008 recession warnings

By BEN SHIMKUS, CONSUMER REPORTER FOR DAILYMAIL.COM

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A financial warning light is flashing again as consumers turn to a risky loan that contributed to the 2008 Great Recession. Subprime auto loans ¿ seen as risky financing options for buyers with poor credit ¿ surged to a 27-month high in March, according to new data from Cox Automotive. Analysts say the spike signals loosening lender standards at a time of broader economic uncertainty.

A financial warning light is flashing again as consumers turn to a risky loan that contributed to the 2008 Great Recession. Subprime auto loans — seen as risky financing options for buyers with poor credit — surged to a 27-month high in March, according to new data from Cox Automotive. Analysts say the spike signals loosening lender standards at a time of broader economic uncertainty.

The loans put more drivers into new cars. But after steering their vehicles off the dealership lot, owners are typically slapped with higher interest rates, longer payment periods, and deeper financial stress. Spiking popularity of subprime loans isn't particularly surpsrising: more motorists were approved for automotive loans in March than any month since December 2022. An increase in auto loans is typically a good sign for the economy. The metric shows that more consumers are visiting car lots and spending thousands of dollars on a new set of wheels.

But subprime loans are creating what some analysts describe as a double-edged sword in consumer lending markets. Loans with lower barriers to access give shoppers have greater access to new cars. However, the loans are risky, both for consumers and companies. For car buyers, the loans typically have higher interest rates and can take several extra years to pay back. The mix of long-term payments and high interest can keep customers underwater on their payment. Subprime loan holders often owe more on their products than they're worth on the market.

But subprime loans are creating what some analysts describe as a double-edged sword in consumer lending markets. Loans with lower barriers to access give shoppers have greater access to new cars. However, the loans are risky, both for consumers and companies. For car buyers, the loans typically have higher interest rates and can take several extra years to pay back. The mix of long-term payments and high interest can keep customers underwater on their payment. Subprime loan holders often owe more on their products than they're worth on the market.

Companies also risk losing money on their products: shoppers are more likely to cave under the weight of their payment if they're already struggling. 'For consumers, the improved access to auto credit is a positive development, particularly for those with lower credit scores,' Cox Automotive wrote in its analysis. 'However, the higher yield spreads and down payment requirements mean that borrowing costs may be higher.'

Companies also risk losing money on their products: shoppers are more likely to cave under the weight of their payment if they're already struggling. 'For consumers, the improved access to auto credit is a positive development, particularly for those with lower credit scores,' Cox Automotive wrote in its analysis. 'However, the higher yield spreads and down payment requirements mean that borrowing costs may be higher.'

Cox Automotive's senior manager for the economics and industry insights team said the March numbers shouldn't come as a surprise. 'Seeing an uptick in subprime in March is seasonal and expected,' he told DailyMail.com. 'The jump was amplified by the stock market turmoil. Well-qualified buyers are more sensitive to market fluctuations, whereas subprime buyers are looking to use their tax refunds to get a new vehicle.'

Cox Automotive's senior manager for the economics and industry insights team said the March numbers shouldn't come as a surprise. 'Seeing an uptick in subprime in March is seasonal and expected,' he told DailyMail.com. 'The jump was amplified by the stock market turmoil. Well-qualified buyers are more sensitive to market fluctuations, whereas subprime buyers are looking to use their tax refunds to get a new vehicle.'

The increased auto loans come as American shoppers continue to stretch their finances in the face of massive price hikes caused by years of inflation. The inflation rate, which peaked above 9 percent in the summer of 2022, forced shoppers to spend more on necessary goods, including groceries, auto insurance, and health car. To keep up with the growing expenditures, economists have seen an uptick in credit card use. In 2024, a rising number of credit card users only paid down their mandatory payments each month. That has already left a record level of debt swashing through the US system.

The increased auto loans come as American shoppers continue to stretch their finances in the face of massive price hikes caused by years of inflation. The inflation rate, which peaked above 9 percent in the summer of 2022, forced shoppers to spend more on necessary goods, including groceries, auto insurance, and health car. To keep up with the growing expenditures, economists have seen an uptick in credit card use. In 2024, a rising number of credit card users only paid down their mandatory payments each month. That has already left a record level of debt swashing through the US system.

Meanwhile, prices across the economy are likely to rise further. President Donald Trump launched tariffs on multiple consumer items that customers should expect to pay, experts told DailyMail.com. His administration slapped 25 percent tariffs on automobiles and steel, which are expected to make car prices and insurance premiums rise further. He also hit consumer products with a baseline 10 percent tariff. Products coming from China face a 140 percent tariff. According to the Yale Budget Lab, the average American household will pay $3,800 more a year as a result of the levies.

Meanwhile, prices across the economy are likely to rise further. President Donald Trump launched tariffs on multiple consumer items that customers should expect to pay, experts told DailyMail.com. His administration slapped 25 percent tariffs on automobiles and steel, which are expected to make car prices and insurance premiums rise further. He also hit consumer products with a baseline 10 percent tariff. Products coming from China face a 140 percent tariff. According to the Yale Budget Lab, the average American household will pay $3,800 more a year as a result of the levies.

Americans have seen crisis caused by subprime loans before. The risky financial moves were a massive contributing factor to the 2008 Great Recession. In the leadup to the financial collapse, thousands of American homes entered foreclosure after lenders aggressively expanded mortgage access. As interest rates rose and housing prices fell, millions of Americans found themselves underwater on their mortgages. Eventually, the toxic mix of sinking home values and struggling customers triggered widespread defaults that ultimately collapsed major financial institutions.

Americans have seen crisis caused by subprime loans before. The risky financial moves were a massive contributing factor to the 2008 Great Recession. In the leadup to the financial collapse, thousands of American homes entered foreclosure after lenders aggressively expanded mortgage access. As interest rates rose and housing prices fell, millions of Americans found themselves underwater on their mortgages. Eventually, the toxic mix of sinking home values and struggling customers triggered widespread defaults that ultimately collapsed major financial institutions.

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