Lesson Not Learned: Subprime Car Lending Surges

Source: Thinkstock
Source: Thinkstock

Today, it is easier than ever before to get a used car loan. A press release from The Nation Wide Lending Network and Complete Auto Loans shows just how easy: “the only requirement is that the applicant make at least $350 per week.” That’s it. With nothing more than a paystub in hand, you can get approved for a car loan in as little as 60 seconds, online. “Can” is not even the right word here. The ad promotes a 100 percent approval rate.

If you’ve been paying attention to the financial media over the past few years, then you’ve probably seen the red flags here already. It’s an apples-to-oranges comparison, but this type of lending screams of the kind of corner-cutting sub-prime nonsense that fueled the financial crisis. According to a New York Times report, auto loan lending to people with credit scores of 640 or less has surged 130 percent in the last five years, and about one in four auto loans are expected to be subprime. “Buy Here Pay Here” dealerships have mushroomed in every corner of the country and the business model is thriving.

The focus clients for these dealerships are people who will never quality for conventional loans, be it due to their poor credit scores or questionable ability to repay. According to the New York Times report, the interest rates on these loans often exceed 23 percent, and the loans are sometimes greater than the value of the car itself. The New York Times also found that many of these loans had incorrect information about the borrowers financial status, something that makes for an easy case of default.

It is not that the dealerships are unaware of the high risk of repayment defaults. In fact, that awareness is as much a part of the business model as anything else. When borrowers are unable to pay monthly installments, the cars are repossessed in no time and sold back to other willing customers.

According to the National Alliance of Buy Here Pay Here Dealers, the dealerships make about 38 percent profit on each deal, the LA Times points out. It is unnerving to see that such dealerships not just engage in a rampant business of taking undue advantage of a vulnerable class of low wage earners, but also have professional cartels for doing so.

The volume of total subprime auto loans is up 15 percent to $145.6 billion in the first three months of this year, according to data from Experian. Market share for nonprime, subprime, and deep subprime new vehicle loans rose to 34.1 percent in the fourth quarter of 2013 from 32.8 percent in Q4 2012. For used vehicles, nonprime, subprime, and deep subprime loans accounted for 62.8 percent of all loans, Experian’s report said.