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Risky lending practices may end in increased consumer bankruptcy

The last major economic crisis was purportedly tied to the sub-prime lending practices in the housing market. That collapse led to many borrowers losing their homes and some filing for bankruptcy protection. Now, while many lenders have tightened the requirements for applying for a mortgage, there are many consumers both here in Washington and elsewhere who have been able to purchase cars and other goods with less than stellar credit.

There are some financial professionals who fear that the risky lending practices of some companies and institutions may lead to another economic crisis. One segment of concern is the automobile industry. Banks and car companies have continued the business of extending credit to borrowers who are considered to be high risk. Many do so because they are able to generate a higher profit from the interest rates that are charged to sub-prime borrowers.

One recent indicator of a possible problem in the sub-prime lending market was the quarterly report from one company that offers credit to its customers to make purchases of appliances and other household furniture. A spokesperson for the company has announced that it has seen an unexpected rise in the number of accounts in default. In addition to this particular company's difficulties, the number of repossessions for vehicle loans in default has more than doubled over last year.

One concern over the increasing number of sub-prime loans is the overestimated ability of the borrowers to be able to pay back the loans in a timely manner. Consumers with lower credit scores may already be experiencing difficulty meeting necessary expenses without the added burden posed by loans they can ill-afford. Washington consumers who are over-extended and are worried that they may be facing serious economic consequences may benefit from educating themselves concerning the possible  financial advantages of filing for bankruptcy protection.

Source: The New York Times, "Stressed Borrowers Rattle Resurgent Subprime Lending Industry", Peter Eavis, Sept. 11, 2014

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