The Big Business Of Subprime Auto Loans
Posted by freemexy on March 12th, 2020
The practice of subprime auto lending is booming across the United States, targeting customers with bad credit with loans that often fail. The companies behind it are making hefty profits.To get more breaking auto news, you can visit shine news official website.
About 10 years ago, the use of subprime housing loans led this country into a financial crisis. Subprime loans are most often issued to low-income borrowers with lower credit scores. They have high interest rates and people default on them more than traditional loans. Today, subprime used car loans have become a huge business and not just for car dealers. Anjali Kamat from member station WNYC looks at lending practices.
ANJALI KAMAT, BYLINE: It's a beautiful morning at the edge of Central Park in New York City. Anouyen Meda Celeste, who goes by Celeste, has just worked the overnight shift.
KAMAT: Today, Celeste is a registered nurse. He came to New York about five years ago when he was 19. He grew up in West Africa. And right from the start, he knew he wanted to take care of people.
CELESTE: I wanted to go to med school, and then, you know, once you get here, you run into medical school, that - that scares you, 'cause if you're on your own here, you need to take the safest route and the quickest one.
KAMAT: So he went to nursing school instead. To pay for it, he needed a job with flexible hours.
CELESTE: I was like, I need the Uber. And people were saying that, you know, they can make 15, some people say ,000, a week.
KAMAT: All he needed was a car. He went online and found what looked like a good deal at a used-car dealer, a 2015 Chrysler with low mileage for ,000. He says he put 4,000 down and took out a loan for the remainder.
KAMAT: Celeste signed the papers and drove off the lot in his new car. He says his contract arrived in the mail a week later with a few things he says he hadn't realized were part of the deal, a sales price of ,000 plus taxes and a subprime interest rate of 22.99%. He had signed up to pay ,000 for a car he thought would cost 10,000.
KAMAT: Celeste had stepped into the murky world of subprime auto finance. It's eerily similar to the subprime mortgage lending that touched off the last financial crisis. And the largest share of these loans comes from independent auto finance companies like Credit Acceptance. They give loans to consumers nobody else will finance. But unlike other large subprime lenders, Credit Acceptance also functions as a collection agency, pursuing consumers after they default. That's when it repossesses the car, sells it and sometimes sues to collect the balance of the loan.
UNIDENTIFIED PERSON #2: So I was at Credit Acceptance for almost nine years.
KAMAT: This is a Credit Acceptance former employee. He agreed to talk to us on the condition we not share his name. He says financing and then collecting loans is by design. Credit Acceptance, he says, uses a proprietary software system that incentivizes dealers to raise the market value of the used vehicles. The bigger the loan the buyer signs, the bigger the commission the dealer gets.
