The United States has an insatiable love for automobiles of all types, and not too surprisingly, with the ubiquitous ads for all sorts of cars for all sorts of people, there is a demand from those that have poor credit scores for automobiles. You might think, that those that have financial resources that are relatively weak, as well as having poor credit and/or work history, in addition to pretty much struggling from paycheck to paycheck would be completely locked out of getting an auto loan for a new vehicle, but this thought would be wrong. Even though, it makes logical sense for people that have low financial resources to spend money prudently and to thereby look for a vehicle that is used, reliable, and relatively inexpensive, they are instead lured in by the siren call of the illusion of relatively low monthly payments with little or nothing down, so that they can have it all, and they can have it now. This means that vehicles are available not only to be sold to those of a low credit rating, but specifically these people are actively targeted and marketed to.
In 2015, the wsj.com reports that there were over 17.5 million cars and light trucks sold in America, with a total value of these sales of about $570 billion. This amount of sales could not have occurred without significant sales to those whose credit worthiness was shaky. Once again, similar to the subprime housing debacle, loans to those of weak credit worthiness are being securitized and repackaged to be sold to investors that are hungry for yield, to which some of these subprime portfolios are, once again, rated at AAA.
Unlike, the mortgage crisis, there are advantages to the subprime loans being made in the auto industry, which can be broken down into the fact that autos are easy to repossess, have a stable reselling value, and a very liquid market. However, like anything, a sudden oversupply of defaulted car loans would saturate the market and would thereby drive car values down. While this is bad for those that loan money for the autos, it can be even worse for those that the loan was issued to in the first place as they will be responsible for any "deficiency" in the difference between the actual selling price of the vehicle once repossessed, against the amount of monies owed, over and above any penalties and late charges applied against them.
Even though subprime loans are priced to take into account the low credit worthiness of the buyer of such, with lenders consequently charging an interest rate of 18% or even higher, in which the cost of money to them is only around 1-2%, making for a very large margin, that is hardly a guarantee that the loan will be paid on a timely basis or even at all, especially if the economy should take a significant downward swing. The bottom line is that the poor credit rating of the buyers of these new vehicles, is clearly a sign that these purchasers in aggregate will not be able to make all their payments, yet these loans are specifically made and targeted towards those very people, primarily because those that initiate these sales, feel very confident that they will find a willing buyer of their securitized loans and thereby are able to book a profitable sale, without the worry of blowback.
There is a wrong belief, that this time it is different, but it is exactly the same, any way that you slice, dice, and make it, as large loans to people that have not demonstrated credit worthiness, that do not have meaningful assets, and further that do not have the resources to deal with bad financial times, are destined to end badly for many of them; and the ultimate buyers of such investments, will find that underneath the pretty wrappings is nothing but financial misery.