Uh-Oh: Subprime Lending Comes Roaring Back

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“Even I wouldn’t make a loan to me.” That kind of admission from a borrower ought to be a tip-off that banks shouldn’t be showering him or her with car financing and credit card offers, but lenders hungry to raise revenue are turning again to the business practices many contend turned “too big to fail” and “bailout” into household terms. 

The number of subprime borrowers — people with credit scores of 660 or lower — issued new credit cards shot up by roughly 12% over the past year, the New York Times reports, citing data from credit bureau Equifax. The article tells the stories of people who have gone through bankruptcy, had cars repossessed and even were sued by debt collectors — who are getting a slew of direct-mail offers for credit.

Other companies that track the lending industry report similar findings: Credit bureau Experian said the number of subprime auto loans has climbed by six percentage points since the end of the recession and now makes up nearly a quarter of new auto loans.

(MORE: Yikes! The Rise of Subprime Credit Cards)

The amount lenders are giving subprime borrowers is still less than a third of the nearly $42 billion they lent in 2007, but they’re making up lost ground at warp speed. Subprime credit card debt shot up by around 55% in just a year, a rate of increase that has “red flag” written all over it.

Are banks crazy? They say they’re not. They claim they’ve learned their lesson and figured out how to tell which borrowers will blow off their debts entirely and which ones might fall behind but eventually will cough up their payments (along with any late fees the bank tacks on).

It’s the targeting of this latter group that has consumer advocates worried. Subprime borrowers are often less financially sophisticated; they may take credit offered to them even if the APR is sky-high or other terms are unfavorable. Even with financial reforms that have made things like credit card applications and statements easier to understand, there’s still a lot of fine print. Car loans, in particular, still have a lot of potential pitfalls for less-savvy consumers because this slice of the lending market was less affected by recent regulations.

(GALLERY: 5 Ways To Repair A Trashed Credit Score)

So far, banks seem to be steering clear of subprime borrowers when it comes to the mortgage market, which is the sector that gave them the most heartburn when the economy tanked and is still weighing on some banks’ bottom lines. By contrast, they’re beefing up their subprime credit card portfolios aggressively; the article says some issuers are even designing new marketing campaigns and card products specifically targeting consumers with badly damaged credit — even people who have recently exited bankruptcy.