I’m fairly convinced a lot of places give loans with horrific interest rates hoping person defaults. They repo the car. Resell it. The person usually has only mostly paid interest and still owes most of the original price of the car plus fees.
From what I read this is predatory but in a different way - auto lenders want buyers to default, then they repossess the car while keeping the previous payments - basically like leasing out the car but higher profits.
People who give out car loans want you to pay back the loan. They don't want to repossess the vehicle. There is a real cost associated with it and you can't just take the car and make a profit. You'd be able to recoup what was owed and some costs may not be coupable. Again, they're not in the business to lend out money to people they know that can't afford it. There may be fraud at the individual level but the system doesn't work like that.
The recovery rates for subprime auto deals are historically around 50%
Defaulting has a cost though. If you default on your car loan, how likely is it that you're getting a loan for the next car? What kind of interest rate are you going to get?
It doesn’t take many people to know this to serve an entire community. The problem is likely that the terms of the loan are such that the car still gets repo’d, just at a lower frequency and higher cost.
On the lender side: I wonder if somehow auto loans are packaged and resold like some other loans, thereby hiding/moving the risk away from the originating lender and into more unsuspecting hands? Not sure how that might work. If it does get repackaged and resold, that may explain some of the reckless lending, if that can be said to exist.
I'm sorry, but the fact is that all lenders and banks are like this.
I once missed 3 payments in a row during the last 6 months of a five year car loan (never missed any other payments). OK, not great, my bad (hey, I was broke). The GMAC loan company then set The Machine in action. My car was repossessed as one would expect. However, everything was stacked against me recovering the car: It was sent 100 miles away to be auctioned off, with any amount of the loan not covered to still be owed by me. Yes, they could sell the car for $10, and I'd owe the rest. To get the car back, I needed to pay off the rest of the car loan in full, plus interest, plus penalties, plus "storage" fees (per day - this really pissed me off), the city of Menlo Park charged me with something as well because of the tow, and I had to get myself out to Vacaville somehow and go to the regional distribution center with all the paperwork to get the car.
This happens so infrequently, the people there were shocked when I showed up (I had gotten a loan from a friend, and spent a week on the phone getting it done before they auctioned the car). Standing in the line with all the dealers looking for cheap cars at auction and repo men who just arrived with BMW's they just stole (ahem, recovered) that morning. It was surreal. They had my car in the middle of a sea of other repossessed vehicles parked bumper to bumper. It took them an hour or so just to fish it out. All my possessions in the car had been thrown away.
This doesn't compare to the horror stories from the subprime loan craziness, nor the abuse in the article, but it just shows that when you take a loan, you are at the mercy of the lender, and they are never merciful. They are normally giant corporations who farm out the work to thousands of happy conspirators who make a living from other people's misery, justifying it because the person who took the loan must somehow deserve the treatment.
I had a friend who kept rolling the negative equity of his previous car loan on to the new one. It's pretty ridiculous what the deals will help you do now. He's since gone bankrupt.
Some simply aren't willing to do the paperwork one must do with transfers over 10k. More importantly, they make more money off of the loans than they do with cash. This is true even if they must repo the car later on - they can often sue you for at least part of the total cost, minus the amount they sell the car for (that last bit might vary by state, though).
Be afraid of those deals. In the US, there is an entire industry based on people defaulting on car loans. It is very possible for a lender to make substantial profit a loan they know is going to fail. The money comes from repossession and resale of the car (a conveniently mobile asset as opposed to houses) combined with penalty charges. So they might push 0% loans onto people who they know are likely to default. The inclusion of GPS trackers on cars has made this all the simpler.
Remember the adage: If you aren't paying, you are the product.
84 months is also ridiculous for a car loan. That means you will very quickly owe more than the car is worth, a dangerous situation for a lender. They would only offer such a loan if they had alternative contingency plans such as massive penalties.
The problem is getting worse. It used to be hard to get 5 year loans for new cars. 8 year loans are pretty common. With the vehicle failing to reach the loan's end of life these new loans roll in the old loan's deficiency until someone defaults.
Actually new subprime auto loans install a device that allows the lender to disable and locate the car remotely (obviously not while in use). So repossession is a lot easier (and presumably less sloppy) compared to the alternative and is part of the reason subprime auto rates have fell over the years. Lenders don't want to repossess as they are in the business of charging interest, not in selling pre-owned cars. They only repossess at last resort. Going after missed payments is also very expensive, especially given the small amounts.
A large part of the bank's equation is that the average American will miss a payment (changing the 0% rapidly)
Also that these are full recourse loans, the bank gets the auction value of the car and has the defaulter in collections for at least the remaining (before depreciation) amount
So this is in the US, but I was looking at car loans just to see what the rates were compared to mine and there were reviews from people stating the bank repossessed their car a day after their first missed payment. Now this is only their side and I don't remember which banks and credit unions were receiving those reviews but I know there were multiple accounts of people with similiar experiences and some of those lenders were nationally known banks. So you mileage may vary with car loan lenders.
A few percent is the normal. The link below says the current 6.1% of car borrowers who are behind on payments is unprecedented.
When a payer defaults they usually loose the item that is being financed, although they have paid far more than the value they've got out of it. Selling and expecting a 40% losses means your selling to people you know won't be able to afford the payments - and (in my opinion) should be treated as fraud.
Usually the bank has no mechanism to alter whether you make payments or not. Keep making payments and they can't repossess the car.
It'll be interesting to see what this does to the credit quality of future borrowers, which is the only leverage the bank has. Secured loans on appreciating assets mean that at some point, the bank has an incentive to write loans that they know are not going to be repaid, because they buy only part of the asset, receive a stream of cash payments for it, and then get the full asset anyway when the borrower defaults. It's like a call option that you get paid for instead of paying for.
Come to think of it, I wonder if this is why we got NINJA loans with the 05-07 housing bubble. Once housing prices started going up consistently enough, it becomes profitable to write loans to borrowers that you know are going to default, because you can take the house and enjoy the asset appreciation while getting a nice stream of cash flows in the process.
Wait if you don't pay back the loan it's "free money" so I don't think people who get into lot's of debt and then default are necessarily idiots. People pay back loans so they can get more loans or get rid of the lean on the car / home. Borrowing 200k and making a 50/50 bet could be a great investment if you could live without credit for a few years.
The credit crysis comes down to bad statistics. When lenders assume a default rate and ignore how dependent this is on the economy they make bad decisions. Home loans in Detroit are a great example of this.
Loan rates are high because default rates are high. Take a look at auto lending. At the bottom you have like a 15% default rate (e.g. the worst subprime auto loans), for these you are going to get (say) a 20% interest rate.
Now it's true that as rates go up, so do default rates, so the same people who would only default at a rate of 10% of the time if the lending rate was 8% are going to default at 15% of the time at a lending rate of 20%. That's the cold, hard, mathematical truth of how risk works -- those who are already safe bets are lent to at very low rates, but those in a precarious position are lent to at higher rates. No amount of hand-wringing or preaching from soapboxes is going to change the math.
Now this can be a strong argument in favor of locking the poor out of credit markets. The argument goes: if they have a history of poor decision making or inability to maintain stable incomes, then we can protect them from making a poor decision about a loan by removing the possibility of getting a loan. I think this argument has a lot of force, but it also catches people who had bad credit due to sheer bad luck, and not poor decision making, and it makes life a bit harder for them. Another cold, hard truth - often to help a majority you have to hurt a minority.
So we try another tack -- make those with good credit subsidize those with bad credit by forcing everyone to pay the same interest rate for a car. That is basically a law against credit analysis. Don't take things like payment history or income into account, every loan is made at 10%. Here the problem is that there are wealthy people who obviously pose little risk, and they will be able to borrow from other markets at a lower rate, and will exit the auto lending market, thus driving default rates up and the average interest rate up and again the net result is shutting down the entire auto-lending market rather than just keeping out those with bad credit.
For this lending business to work, we need the best credit analysis possible, and attempts at making credit analysis less accurate create dead weight costs for everyone.
Really this is an object lesson in an old economic dictum: don't mess with prices to stabilize incomes. If you want to help the poor, give them money. Don't try to regulate the prices the poor pay for things.
BHPH model is NOT the same as getting a subprime loan from a bank or credit union. Very few cars are sold via BHPH.
Also, many states require that repossessed cars are sold at auction, and the proceeds go towards the balance owed (aka the poor person who borrowed the money).
Usery laws are complex, and it is difficult to know why the lady in this article got a loan for 20%. That is unfair and I feel bad for her.
I can understand that amount if it’s justified for a family vehicle or a work vehicle but I have a sense that a lot of these loans being defaulted on are for BMW/Mercedes basic sedans which don’t serve much of a practical purpose beyond the logo on the hood.
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