These loans are often bought and sold in securities markets but might still be serviced by the original lender. Without a home, you might 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 gets very difficult.
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 includes one or more of the following attributes:
- High-interest rate loan.
- Sold to someone that can’t afford it.
- Investor regularly purchases blocks of subprime loans.
- Often secured by property that has marginal value.
⎆ The high-interest rates of the predatory auto loan.
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 loan rate. The average auto loan increased from $14,700 to $17,400 according to TransUnion with car loans expected to top over $18,000. Even if default rates soar to 25% or more the high-interest rates for the remaining loans keep subprime lending profitable.
⎆ The “buy here pay here” auto loan trap.
In the case of “Buy Here Pay Here” lots, the dealership marks the prices up 5–6 times more than what they pay for the car at an auction. In the case of a new car dealership, the consumer gets very few choices about the car they can buy. Plus, the markup is often much more than what the buyer with good credit pays for it. Of course, that’s in addition to the already high-interest rate.
They often repossess cars and simply resell them, especially at “Buy Here Pay Here” lots. Additionally, these lots often do not report if the person pays on time which keeps them from repairing their credit. By reporting only if the consumer is not paying on time it keeps the consumer in a revolving trap to a “Buy Here Pay Here” lot for financing.
Although a “Buy Here Pay Here” loan comes from a special type of subprime lender, the overall tactics are the same which is to make all the money from these unsuspecting consumers that the market will bear in profit.
The $700 million bonds Santander offers investors more than eight times the profit they could get from a Treasury bond. Also, a staggering $280 billion in subprime or predatory car loans are outstanding today. At the same time, subprime car loans went from 20% in 2009, to 27% in 2013 and 31% in 2015. Below, you will find data for the more current interest rates for subprime auto loans.
“The average rate paid by risky borrowers who fall into the deep subprime category was 20.93% for a 72-month used car loan taken out in the second quarter of 2020, according to Experian’s data. It has risen slightly from the average 20.31% for used cars for the same time a year ago.” —Detroit Free Press
“Business Insider reported that of the $1.1 trillion in auto loans outstanding, about $280 billion were subprime.” —Forbes, 2020
Why do banks 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.
The more you know, the better financial decisions you make for yourself and your family. Therefore, I encourage you to do your research, read our Bankruptcy Manual, and continue to educate yourself for a brighter financial future.
Resources for Bankruptcy
Louisville Kentucky Bankruptcy Forms
Chapter 13 Auto Cramdown vs Chapter 7 Redemption • Video
How to Rent or Buy a Home or Car After Bankruptcy
Chapter 7 Bankruptcy Auto Loan Redemption
Rescue and Predatory Home Mortgage Fraud
If you are thinking about filing bankruptcy, don’t delay because timing is crucial. I am here to help you. So, contact my office right away to start the conversation. Nick C. Thompson, Bankruptcy Lawyer: 502-625-0905
