These loans are often bought and sold in securities markets but can be serviced by the original lender. Without a home you may live with a relative or you may even live out of a car. But if you don’t have a car to get to work in life may be impossible. In 2015 Santander Consumer finished selling $700 million of its subprime auto loans to Wall Street investors. The average car loan in this block of auto loans had an average FICO score of 552, and about 15% were in default. This is just after Santander settled a lawsuit with DOJ for over 9 million for allegedly improperly repossessing more than 1,000 cars from active duty service members.
What defines “Predatory Auto Subprime Car Loans”?
A predatory car loan has a:
- high interest rate loan made
- to someone that cant afford it
- normally because an investor will purchase a block of such loans and
- it is often secured by property that has a marginal value.
Predatory auto loans carry interest rates from double to six times a normal bank rate. It is not unusual to see buy here pay here loans at over 30%. But the majority of predatory or subprime auto loans hover around double to triple the bank car loans rate. The average auto loan increased from $14,700 to $17,400 according to TransUnion with car loans expected to top over 18,000 by this year. Even if default rates soar to 25% or more the high interest rates for the remaining loans keep subprime lending profitable. In the case of buy here pay here lots the dealership may mark up the car 5 to 6 times more than what they paid for the car at an auction. In the case of a new car dealership the consumer is given a small choice of what car they can get and the mark up is often much more than what the buyer with good credit is offered.
Often cars are repossessed and simply resold especially at buy here pay here lots. “Buy here pay here” lots do not report if the person pays on time keeping them from repairing their credit. By reporting only if the consumer is not paying on time it keeps the consumer trapped into returning to a buy here pay here lot for financing. Although a buy here pay here lot is a special type of subprime lender the overall tactics are the same which is to make all that the market will bear in profit.
The $700 million bond Santander offered profited investors more than 8 times the profit from a Treasury bond. Almost 1 trillion in subprime or predatory car loans is outstanding as of 3-2015 in auto loans with subprime car loans going from 20% in 2009, to 27% in 2013 and 31% in 2015. Just as the standards to get a home loan were lowered in 2005, the standards to getting a car loan has been lowered with some people qualifying for loans while their old auto has not yet been repossessed. Both failure rates and repossession rates have increased as a result. Repossessions are up 70% from 2013 to 2014. A failure in the car loan market is not as likely to cause as bad a recession as the mortgage problem in 2009. But it will still cause a problem in a weakened economy and will lower consumer confidence. Why would a bank or investors purchase such securities and encourage such lending practices. Because it is very profitable. While the market is in demand for these highly profitable investments it will thrive… until it collapses.