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Ally Financial’s Move Into Subprime Deemed Risky

Many grew up borrowing money from Ally’s former self GMAC Financial Services. Today, Ally is the primary backer of GM auto loans.  Financial woes across the country and a heavy leaning on subprime mortgages, led the company to the government’s financial well. After $17 billion in investment, the U.S. now owns 74% of the company and wants to unload its burden. That leaves Ally in need of a high profit area.

Subprime auto loans on used cars is the area where a lender can make the most money. It is also the area with the highest risk of default. History has proven that subprime lending is risky at all times. Ally’s predecessor had all of its financial troubles at the hands of subprime mortgages. Granted, those were larger loans and most banks had the same troubles, but has Ally learned enough of a lesson to avoid past mistakes?

Ally seems to think that it has based on this statement released by company spokesman James Olecki:

”Ally Financial’s strategy is to extend credit using sound underwriting criteria and responsible financing practices.”

He went on to say:

”We accept retail auto contracts through the full credit spectrum — including nonprime — as a normal part of our business. We place greater emphasis on the higher end of the nonprime spectrum and we only approve credit for qualified customers who demonstrate the ability to pay.”

Of course, this move has its nay-sayers like James Ellman, a hedge fund portfolio manager at Seacliff Capital who released a statement of his own:

”Ally is the kind of company that will likely need to call for the government’s financial ambulance at some point in the future. I don’t know if it is sooner, or later, but it will happen.”

No matter what your take on Ally Financial’s ability to run a subprime lending program, it is still a risky venture. Are the taxpayers prepared to bail the same company out again if things go south, or should they even be asked to?

About the Author

The author has many years of experience in automotive finance and insurance. However, each consumer's situation is unique. It is best to contact a finance specialist for further assistance.
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