Subprime car loans are pretty much terrible. They’re exploitative of lower-income borrowers, financially risky for lenders, and frankly the only thing that keeps them from being every inch as disastrous for everyone as subprime mortgages — so far — is that their dollar values are lower.
This isn’t new, as John Oliver pointed out in last night’s episode of Last Week Tonight. Sub-prime auto lending has been present for ages and steadily rising for years, with all the same bad banking behavior we used to see in mortgages before the economy half-collapsed on the back of the housing market.
But that increase, which may be pushing us towards a slow-motion disaster once again, is pretty terrible all around, and Oliver explained why.
1. For millions, a working car is not a luxury, but a necessity
86% of Americans commute to work by automobile, Oliver pointed out, and if you don’t have a car, just holding down a job can be a tremendous challenge. While public transit is a reliable, robust option in a handful of American cities, hundreds of millions of people don’t live in those cities. Oliver shares a story from one woman whose commute by multiple buses and trains takes her about two hours each way — for a distance she could do by car in about fifteen minutes.
That’s why car purchasing keeps soaring. “And now nearly a quarter of all car loans are now of the high-risk, sub-prime variety,” Oliver said. “So many are being issued, they recently reached a 10-year high. And if the phrase, ‘a boom in sub-prime loans’ is making your eye twitch with flashbacks to the mortgage crisis, just wait, we will get there.”
2. The shadiness of sub-prime lending and buy-here, pay-here dealers
These lenders have been around for ages — and getting busted for just as long, as CFPB actions from unfair debt collection and deceptive lending practices show.
These dealers are themselves the lending institutions. Oliver played one ad from such a dealer that explained how it’s able to extend loans to everybody and their bankrupt grandma: “First, we are the bank. We don’t have to send you or your deal anywhere. [And] the second reason we can get you financed is because we don’t even look at your credit score.”
In response to which, Oliver quipped: “Of course! In fact, we don’t even know what a credit score is! What is a good one? PG-13? 640 on the verbal, 710 on math? 3 under par? Is that a good credit score? We’ve got no idea, and that’s why you should trust us.”
“Theoretically,” Oliver said, “it is a good thing that car dealers lend money to people who can’t get financing elsewhere. But in practice, these dealerships can trap people with few options into paying vastly more than a car is worth.”
Oliver pointed to the story of a Chicago-area woman to illustrate the way in markups, add-ons, and other shenanigans, plus the interest rate, can vastly inflate the sum consumers end up on the hook for. This particular customer bought a car worth about $3000 and ended up being sold about $13,000 worth of loan for it.
“Holy sh*t, that is outrageous,” Oliver flatly said. “The only way it is acceptable to sell someone a $3000 car for $13,000 is if you slip a mint condition X-Men Number One into the glove compartment; at that point, you’re being generous.”*
And while repossessing a car that isn’t being paid for is a dealer’s right, some of them get a bit aggressive. Like the one that took a car with a woman’s 9-month-old baby still inside, while she was dropping off her older children at school.
To which Oliver offered some advice: “Don’t take a baby is a good general rule for everyone, whether you are repossessing a car, choosing a prom date, or making a selection in the NFL draft. Don’t. Take. A. Baby.”
3. It goes around, and around, and…
Oliver pointed to the saga of just one car, a 2003 Kia Optima that the LA Times had traced the provenance of. The history goes something like this:
- April, 2008: valued at $5350, sold for $11,000
- Later 2008: repossessed
- August, 2008: Sold again
- Dec, 2008: Repossessed again
- Jan, 2009: Sold again
- 2009: Repossessed again
- May, 2009: Sold again, but the buyer complained about the transmission so the dealer took it back
- May, 2009: Sold again to another buyer
- 2009: Repossessed again, owner declared bankruptcy “thanks in part to payments he owed on this piece of sh*t demon car.”
- Dec, 2009: Sold again
- 2010: Repossessed again
- May, 2010: Sold again
- 2010: Repossessed again, “even though the owner, a mother of four, claims she made every payment”
- Feb: 2011: Sold again
- March, 2011: Repossessed again
“That one car changed hands eight times in three years, each time at a price double or even triple its Blue Book value,” Oliver said. “At which point you almost feel bad for the car, which presumably needed two sessions of therapy a week just to be able to start its crappy engine again.”
The LA Times story stopped in 2011, but Oliver’s team tracked down the fate of the car after that. It was sold, repossessed, and sold again before finally being stolen. “And I really hope whoever did that drove it straight off a f*cking cliff,” Oliver added, “Although I am guessing even then some sleazy lobster ended up selling it to some poor, unsuspecting fish.”
4. All of this has happened before…
Remember that whole 2008-2009 mortgage crisis thing? Yeah.
“This feeding frenzy over sub-prime customers now includes big lenders, like Santander and GM Financial. They have both expanded their sub-prime auto-financing,” Oliver said, then also calling out newer businesses that specialize in sub-prime auto lending.”
“And you might be wondering: why the f*ck is everyone in such a hurry to lend money to people with bad credit?” Oliver sensibly asked. “I mean sure, in the mortgage crisis, they were doing that so they could bundle the bad high-interest loans together and sell them on Wall Street, but there is absolutely no way that is happening — THAT IS HAPPENING AGAIN. That is exactly what is happening RIGHT NOW.”
As Oliver highlighted with news clips from the past few years, investors and finance types have been worried about a subprime auto lending bubble for quite some time now.
“Yes. There is concern that this could be the sub-prime mortgage crisis, but with cars,” Oliver continued. “And normally, if you add the phrase ‘but with cars’ to any historical event, it sounds a lot more fun, like, ‘The assassination of Abraham Lincoln, but with cars.’ Sadly, this is the exception to that rule.”
The happy news, if any is to be found, is that subprime auto loans are a much smaller slice of the overall American economy than subprime mortgages were. (That whole thing where a car is $20,000 but a house is $200,000 comes into play here.) “So even if they do go bust,” Oliver explained, “this wouldn’t necessarily be The Big Short all over again, so much as the direct-to-video version with Brad Garrett instead of Brad Pitt, and instead of Ryan Gosling, an actual gosling named Ryan.”
However, that doesn’t mean we’re all in the clear. Wall Street firms claim to have learned how not to ruin the entire economy with the reselling of packaged loans, but, Oliver says, “there are trouble signs.” For one thing, the standards for loans are really low. One expert Oliver showed a clip of uneasily joked, “You really just need a pulse right now to get a subprime auto loan.”
To which Oliver, with a forced weak laugh, countered: “That’s a good joke. Solid setup, hard punchline, potentially devastating effect on the American economy. Top-shelf comedy there, it’s the rule of three, is what it is.”
5. And so, all these car ads could look like this…
“The news that used car dealers are predatory is clearly not new,” Oliver concluded. “But it seems these days market pressures are forcing them to be more aggressive and take more risks.” To illustrate the point, Oliver proceeded to run his commercial for Crazy Johnny’s Used Cars, joined by Keegan-Michael Key and two rather amazing cowboy hats.
“Do you have bad credit? We don’t care! Have you filed for bankruptcy? We don’t care! Is your credit so bad that giving you a high interest loan will basically trap you under a mountain of debt from which there is no reasonable hope of escape? We don’t give a f*ck!”
“We’ve got a beautiful offer right here for you,” “Crazy Jimmy” Key chimed in. “This here is a pre-, pre-, pre-, pre-, pre-, pre-, pre-owned 2003 Kia Optima! It comes fully loaded with four tires, up to one engine, and a beeping device that emits a sound which will haunt your dreams.”
“Does it come with anything else?”
“It does! If you check the backseat, this car has a f*cking baby in it! I have serious personal reservations about the situation this child is in!”
“Look, don’t focus on that,” Oliver demurred. “This car is worth $2000, but we’ll let you have it for zero down, and just $200 a month for the next seven years. That’s nearly $17,000!”
*The highest auction price for an X-Men #1 in pristine condition is more than more than $492,000.
by Kate Cox via Consumerist
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