The financial services sector of the Western economy has grown to new heights. It is bigger than it has ever been before. Whether you’re in the market for a car, house or any other big-ticket purchase, you’ve probably had to deal with companies in the financial services industry. As little more than four years ago it was much easier to secure a loan or some type of financing that is the case today. People were spending beyond their means because of the perceived low cost of borrowing money. Things changed and it now seems there is a push toward more regulation and tougher rules when it comes to lending and borrowing money.
Prior to the 2008 financial crisis securing financing was actually quite feasible, bordering on being very easy. Regulations were lax and lenders were almost happy to provide financing of any sort to any person. Many people borrowed far beyond their means during this time, in the hopes of securing car loans and home loans for products that once seemed out of their reach. Once interest rates were raised, however, many people started to default on their loans, unable to make the required payments. This snowballed until the entire system collapsed and many firms went under.
What happened was that lenders were up to the ceiling in bad quality loans in their portfolios. Because of the soft hand being used in the lending process and the dollar signs in the eyes of the consumer, lenders were left with a large amount of bad debts being owed to them. Many of the loans given out as bad credit car loans and home loans were high-risk (in terms of having the loan repaid fully and on time). These loan portfolios, increasingly being called toxic assets, did not look good on the financial statements of these companies.
What many companies involved did was repackage the individual bad loans as a bundled set of loans, essentially creating a new financial instrument. This raised the rating of the individual bad loans as they were now considered part of a package. Credit rating agencies were also lax in their enforcement and oversight of this process leading to the creation of more and more of these packaged loans. These bundled packages were then sold on the market to other companies who thought they would be a solid investment. This, however, was not the case.
Once interest rates rose many people were left without the ability to pay off the loans. Many had their houses and cars repossessed and large companies around the world were left with these toxic assets on their balance sheets. Unable to recoup the money paid out by lenders, the entire economic system suffered a major blow. Consumer and business confidence and spending went down and things seemed to spiral out of control.
Although total disaster was averted there was a renewed sense of necessity in the strict regulation of the financial industry. Although many of the regulations once in place are still no longer there, there have been moves made by governments and the corporate sector to squeeze down on the lending process. It is much harder today to secure a car loan or home loan than it was prior to 2008. Many lenders will no longer accept no money down and the financial background of the applicant is scrutinized much more. Although lending is picking up again since the 2008 collapse, the restrictions and rules surrounding a company’s lending practices is much tougher once again.
To be sure this type of problem does not happen again (on the scale that it did) it is the responsibility of both lenders and those seeking financing to be realistic about what is feasible and what is not. Just because someone is in the market for a large loan does not mean that they are able to handle the responsibility. Likewise, if someone is offering a “too good to be true” type of loan, then it probably is just that – too good to be true. It’s important to look at your individual situation and be realistic about what is possible for you to handle before jumping into the car loan and home loan arena.
Pierce Boylin is an auto enthusiast and financial/business blogger. He often contributes articles across the internet on a variety of topics. To learn more about financing and car loans click here.
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