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It’s like Déjà vu all over again. A rush of subprime car loans to buyers with a dubious ability to pay them back ending well is about as likely as Florida Gulf Coast University making it all the way to the NCAA Final Four. According to an Automotive News article last week (http://bit.ly/YE7UQ9), Federal money decisions are driving risky loan practices.
According to the article, “with low interest rates pinching yields on their traditional investments, insurance companies, hedge funds and other institutional investors hunger for riskier, higher-yielding securities - bonds backed by subprime auto loans, for instance.”
I was on the front lines of automotive retail during the early 2000’s as banks made outrageous loans to people who had no business taking them out. Truth in lending keeps us from putting part of a car on a credit card, and yet thousands of buyers (millions?) used their home equity to make down payments on way more vehicle than they had any business buying, and still commit to outrageous payments that depended on a peak economy to sustain. Anyone working Manheim auction lanes in 2009 got to see the end result, as thousands of repo vehicles crossed the lanes, many without any bid. We know how that ended, and yet, here we go again.
This DeLorean repossession video with the owners throwing a fit and kicking the repo guy is funny, but not when thousands of them put a major dent in our economy.
There will always be a place in the market for subprime loans and lenders, and the economy has created an environment in which more people need them than ever. But as important as these loans are for many car buyers, there are two reasons this is doomed to create an even bigger problem than before.
PEOPLE ARE MORE WILLING TO DEFAULT ON CAR LOANS
Now that the stigma of bankruptcies, foreclosures, and repossessions has gone the way of Kim Kardashian’s slim waistline, borrowers may be as quick to let their vehicle go as Taylor Swift is with a boyfriend. A recent CNN article reports that auto repossessions dropped nearly 30 percent from 2009 to 2012, but iffy loans and less conscientious borrowers will drive that right back up.
THE ECONOMY IS NOT FIXED
The only topic in the news with more disagreement about the status or existence of our so-called economic recovery is whether North Korea is serious about attacking the United States. But if you have shopped for bread, gas, or a car recently and seen the steady rise of prices, you probably get the impression we are still in a recession.
Hey, the good news is that banks are loaning more, so car dealers can sell more – in the short term, anyway. What do you think?
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Tom has an MBA in Marketing and is an automotive writer and author with more than 15 years experience in virtually every aspect of the retail auto industry. He has been a performance leader in everything from sales and service, to web development and viral marketing.