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Subprime consumer lending industry, also known as a second chance lending in finance, deals with issuing of loans to people who have trouble in maintaining the repayment schedule. A unique property of these loans is that they have high interest rates and terms which are less favorable. This is because the industry needs to cover up for the high risk usually involved with giving loans to people who have a dubious credit history. The founders of this consumer lending industry concept usually maintain that the service extends to the people who could not be credit-worth in normal terms and conditions. The lending industry is particularly advantageous to young people who got discriminated against in the past: now the innovation of this system of lending in the mortgage market have ensured equal consideration of youths and other people who do not seem credit-worth.
Throughout history, the credit quality of particulars has weakened than that of prime borrowers. This is because this method of lending has focused on the people who are lees credit-worthy and considered their interests. These people, especially the youth need to be empowered through financing their projects and lending them money to start a business. The growth of this industry has been triggered tremendously by the credit rating that gets conducted in people’s economic lives. This occurs when their borrowing, lending and earning history gets recorded and analyzed as they become economically active (Burke).
Banks increase the loan rates for the highly risky consumers. In establishing the interest rates for this loan product, the banks usually access the credibility of the person in question. For example, people who have tarnished their names in the past may get a loan at an unusually high interest rate. In fact, it goes to as high as 4% sometimes. In the recent past, this industry has extended to the field of motor vehicles. People are getting loans with high interest rates so that they can use them to buy cars. This application of the fundamentals of the sublime industry knowledge has come with its own unique challenges and strength. Across the world, the sales of subprime debts have been increasing as time goes. This is due to the world economic recession. The companies this industry that give credits for motor vehicles have created a tough method to keep their clients on toes (Greenberg). This involves security of their money. The assets used as security for this loan are sometimes frightfully expensive and get used by the subprime lending industry. Reprocessing cars is easier than reprocessing homes. Therefore, lenders of this industry prefer lending car owners loans instead of home mortgages.
Consumers who have poor records easily get identified, and this enhances effective performance of this system of lending. Growth has been marked by consumer lending in the recent past since this industry can easily define consumers who do not have exemplary records. On this same note, anyone with above average credit responsibility gets the loan at a lower interest rate. The motor vehicle industry has gotten dominated by finance companies that are so willing to offer loans to individuals (Aalbers 160). This has increased together with rising sales in old and new cars, especially in the United Sates. In America, some pieces of legislation have triggered the growth of the lending industry. For example, the Durblin amendment is legislation that limited the banks from charging consumers extremely high fees when their customers swipe their credit card there. Also, lenders in the United States search for new borrowers when they incur losses from their previous clients. In the recent past, credit card lenders in the United States have given out 1.1 million new cards to borrowers who have damaged credit. These results were analyzed by Experian, a credit firm in the United States, which revealed that this industry is growing at a tremendously high rate, and it gets exposed to a greater risk as it develops.
In the past, as this industry was growing, it experienced intensification of frauds that targeted the beneficiaries of this system. For example, in 1995 it was reported that the most vulnerable individuals to the service such as the home equity lending fraud from this industry are presented by the elderly group of home owners. In the United States, statistics have shown that this category is made mostly by Latinos and African Americans. These people easily get cheated into taking the loan products from the Subprime Lending Industries, and they suffer the loss of their money since get extremely high interests’ rates. In the past, around 1995, these people were the most vulnerable because they lacked basic knowledge and familiarity with the lending process. They also had decreased access to traditional credit. Therefore, they have become the center of attention from unscrupulous lenders whose interest is only making money out of the desperation of these individuals (Burton 144).
In the past, the growth of the industry in question has enhanced the creation of several approaches to the concept of lending. This has been a key step in shaping the future of the companies in the lending industry. It included, for example, aggressive, no-nonsense collective approach which stipulates that the company should quickly mobilize its aggressive collective efforts once a borrower defaults. This provision enhances the performance of the industry since it helps them tame the losses incurred by it from time to time.
In the history of the industry of lending, there have been many subprime lenders who have presented themselves in public and offered their personal stock for sale, through public gathering. In fact, 12 companies went public in 1996. Many of these companies that went public got considered by the society to be promising stockholders, sizeable investments and better than average because they proved too lucrative. The stock purchases of these companies were the first steps towards the growth and development of the companies in this industry. This also provided the capital to invest in the system of lending.
The other historic concern that has enabled the growth and development of this industry is the fact that subprime lending has been legalized in many countries. The law has factored the system of lending as one way of economic investment in a country. Also, these companies have created terms and condition to control their operations. This has enhanced the growth of these companies: since their terms and conditions are well pronounced, it makes them sound as a legal entity (Rodgers 234).
In the recent past, this method of consumer lending has made admirable progress in their quest to provide credit services to people with unfavorable credit histories. It has marked a noticeable development since banks have been more available to offer this service to the interested individuals. In fact, 2010 marked 41% in the number of risky borrowers. Also, retail credit cards have marked an increase in risky borrowers. According to Equifax, there was a 4.7% increase in the rates of lending to risky borrowers in the year 2010. This is a remarkable progress for this industry.
The growth of this industry has been distinguished by the fact that credit has been made more available for more people who are willing to invest and change their financial lives. Also, this industry has led to the growth and development of legislators and regulators who investigate the matters concerned with the subprime lending industry. They investigate such issues as the effects of subprime lending on the banks and the extent of the risks involved when banks provide this lending. The abuse by subprime lender is also an aspect that has grown together with the development of this industry. This occurs because not all the consumers succeed in their investment. The investments of these companies are at the stake of suffering losses in the event of lack of payment of these loans (Fabozzi 106).
Student loans are another key aspect of the lending industry, which has marked a considerable landmark in the growth of this sphere. These loans are considered being subprime because of the increased dropout rates of students from schools in this country. The high risk of these loans not being paid back by students who happen to drop out of school happens to be the causative factor triggering their high interests. Also, these loans are treated as subprime lending to students since it is a hard task to foresee the future earnings of these students. Therefore, the manner in which these loans get structured has changed over time. For example, these loans are sometimes granted in the form of income sensitive repayment loans, soft loans and income contingent repayment loans.
The system of lending in question has also been favored by the lending legislation of different countries across the world. The United States is the best place where this industrial institution has grown and gained respect over time. This industry is an extraordinarily fundamental index of the economic life of the poor people today. People who make skilful use of these loans benefit accordingly, and their credit status becomes better and better every day. Therefore, a remarkable growth gets marked by a number of cooperative citizens since they make use of this service, to come up with a mutually beneficial industry. The manner in which the lending industry markets its loan products to consumers has changed in the recent past. It has been more vibrant in advertising its loan products to the people who are not credit-worth. This has resulted in a massive growth in the industry since consumers get readily educated on the possible guidelines to follow in order to ensure that they become beneficiaries of these loans. It has led to an increase in the circulation of money in the economy, which is a fundamental landmark to economic empowerment in any stable economy.
High interest rates make a lot of money for these industries. Therefore, the industries have enough money to expand their services to a larger part of the population. This means that the growth of this industry is likely to continue over time. This lending industry also has strength in its marketing strategies. Its marketing strategy makes it remain outstanding and convincing to its targeted clients. It targets the home owners and people who think that they cannot get loans from other credit sources. This has tremendously enhanced the growth of this industry in the recent past (Retsinas 24).
This method of lending is a hugely lucrative business. It has proved to be one of the fastest growing fields in mortgage lending business. Its development has fundamentally been marked by the ever increasing prevalence of credit card debt among other unsecured debts. The result of this is the fact that lenders put extremely high interests on their loans. Although the lending industry gets exposed to a high risk of incurring heavy losses, the lender gets particularly high interests rates, that they even cover up for the risk. Therefore, the lenders benefit wholesomely from the origination fees and the hefty interest rates.
The lending industry has designed a remarkable tool to establish the credibility of its potential clients. The borrowers who have a perfect credit history get the A credit rating. It means that these borrowers can be accorded the best loans that industries offer. It is tremendously beneficial to have this system to determine the credit history of clients to ensure the industry does not make losses. Therefore, this development is decidedly fundamental in composing the success of the lending companies in the industry today. This industry has experienced an explosion in the recent past. This has been marked by the development of a lot of companies due to the rise of many lending companies. These companies resort to the same concept used in the Subprime money lending Industry as an important part of their operation.
Another key aspect that has marked the growth of the lending industry is the fact that these companies offer loans to students. It is immensely beneficial to students since it ensures that the students acquire education regardless of their poor financial background. This service from these industries is extremely crucial since education improves the life chances of everyone who pursue it. Therefore, it is indisputably clear that these students are likely to repay these loans on time, in regard to the terms and conditions of the industry. However, the growth of lending service has suffered a challenge in the past since the companies did not consider whether borrowers would repay the debts on time. It has also triggered the development of policies and recommendations for the lending industry. These programs help buyers finance their loans at lower rates. These programs are supremely valuable in maintaining the stability of the lending industry. It also prevents the extinction of this industry since its clients do not strain a lot as a result of the extremely high interest rates (Bitner 11).
Lending has grown enormously in the recent past. It has extended its services to the motor vehicle industry, with an intention of offering loan products to individuals who are not credit-worthy in traditional banking systems. They have successfully managed to issue $ 129 billion to in asset-backed securities. The extension of this service to motor vehicle beneficiaries has come with new challenges. The industry gives access to loans even to individuals with credit scores below 680. Half of the profits that are found in this industry originate from automobile loans. Auto loans have been known to be less risky for the lenders because the lenders have more flexibility to deal with a car loan. It makes the lenders more willing to lend to consumers who have lower credit scores. Their willingness and risk to do this enhances the fast growth of this industry.
Lending also guarantees consumers a protection. The fact that they promise the consumers to protect their private information from getting accessed by other people builds a fantastic deal of confidence from the consumers. The consumers of this loan would want their personal information on credit history and their earnings to be kept a secret to these companies. A promise by the companies to follow the terms and conditions of service are a positive step towards the achieving of a stable Lending Industry. Therefore, the Industry is growing at a very fast rate. In fact, the industry needs to invest more in professionals who should sharpen their marketing strategies, to make it a world-class company in terms of competition and the economic scenarios around the world (Schwartz 126). The marketing efforts of the members of the companies in this industry are intensely focused on the consumers. Precisely, they focus on the consumers who have gotten redlined by the traditional credit options. This industry considers several factors in the quest to determine the people who are predisposed to their loans. They later conduct convincing advertisements, which act to convince that it is extremely easy to get a loan from these companies. This is one of the reasons the industry is growing at a relatively high rate: it is able to appeal to the needs of consumers by the use of advertisements.
The growth of the lending industry has also been marked by the extension of loan services to home owners. The industry has successfully appealed to the needs of the home-owning consumers so that they productively issue them with loans. Sometimes, the home owners issue their homes as security for this loan. The challenge ensues when these home owners cannot afford to repay the high interest rates that are found in the subprime lending terms and conditions. In the recent past, some people have lost their homes since they were sold out of the inability of consumers to the settle the debts issued by the lender on the grounds of the terms and conditions stated in the subprime lending industry.
Criticism and Challenges
The industry has suffered some crisis in its attempt to rise beyond challenges of the high risks involved within its working parameters. At first, the industry entailed the use of assets as a security for this loan. This was a more secure way of guaranteeing their payment since they had substantial items sale of which could return the capital invested in these loans. With time, the consumer of this product began to default in large numbers. Also, many consumers of the subprime industry took adjustable rates loans since they gave them a lower initial interest rate. This meant a higher risk for the investors of the subprime lending industry since people would benefit more from the loan than their lifetime servicing of the same kind.
In America, people with tarnished credit histories are rendered around $ 100 billion every year. People without credit histories are another significant category of the beneficiaries of the loans offered by this industry. In the recent past, the credit status of these people has been a hard task for lenders to develop since these people have not had any record in their past financial lives. Therefore, such people are at the risk of not paying the debts. However, these borrowers get the chance to enjoy these loans on benefit of doubt since their credit status cannot be established (Gramlich 101).
From the foregoing, it is unequivocally clear that the subprime consumer lending industry has developed gradually over the past. Also, the industry has grown to facilitate the economic participation of the people known to have poor reputations and low credit ratings. A possible area that deserves to be addressed in the subprime lending industry is the extent of risk that gets entailed in the loaning of individuals with poor reputations. Possibly, the governments across the world should consider improving the terms and conditions of subprime lending industry to prevent their exploitation by irresponsible citizens who have tarnished their names in the traditional lending agencies. This would ensure the ultimate growth of this industry with a considerable participation of the economically unstable people in building the economy.