Legalized Loan Sharking in Auto Loans

How important is your car to you? Unless you live in Manhattan, or downtown San Francisco, or a handful of other urban areas, the answer is likely to be: VERY important.

Without it, you can't get to your job, you can't take your kids to daycare (or to school, if they missed the bus), you can't do the emergency grocery-shopping run. You're trapped.

Which is why so many of us will pay a huge portion of our disposable income for a dependable vehicle. And for the poor, it's a particularly large portion, and particularly crucial.

I've written before about all the ways our society makes it hard to be poor. Adding insult to injury, we find all kinds of ways to make money from making their lives more difficult.

Today's New York Times has a depressing article that illustrates what I mean, as DealBook writers Michael Corkery and Jessica Silver-Greenberg explore the messy world of subprime auto loans. As they write,

Across the country, there is a booming business in lending to the working poor — those Americans with impaired credit who need cars to get to work. But this market is as much about Wall Street’s perpetual demand for high returns as it is about used cars. An influx of investor money is making more loans possible, but all that money may also be enabling excessive risk-taking that could have repercussions throughout the financial system, analysts and regulators caution.

Most of these loans are classified as "subprime", which means that the loan is made to someone with less than perfect credit, for which he or she pays significantly higher interest rates, to compensate the lender for the higher level of risk of default.

You remember subprime loans, don't you? Subprime mortgages, bundled, sliced, and diced, were sold off hither and yon, and damn near brought down the whole US economy in 2008. (Yes, I'm exaggerating and simplifying, but not wildly.)

I'd have thought investors and bankers would have developed a modicum of caution from their last foray into the world of subprime. Apparently not.

What happens when people are enticed to invest in a property with "guaranteed" high returns? They get lazy about doing a thorough investigation of that investment opportunity. And that gives a green light for another problem: "The intense demand for subprime auto securities may also be fueling ... a rise in loans that contain falsified income or employment information."

Why does that sound familiar? Oh, yes, the robo-signing of home mortgage loan applications and (later) of foreclosure proceedings (if you've been able to blank out the memory of that charming "process", read my post here). 

What does this growth market mean for actual consumers? Well, consider the case Corkery and Silver-Greenberg present:

Mandy Gray of Boiling Springs, Pa., is unemployed and depends largely on her partner’s $11-an-hour salary as a forklift operator. She says she has struggled to keep up with the $306 monthly payments on her Santander auto loan....

Stop there. Two people are living in rural Pennsylvania on little more than an $11 / hour salary. Gross -- let's forget about Social Security, local property taxes, etc. etc., that's less than $2,000 per month. From that, Ms. Gray and her partner are paying for housing, food, electricity, and a car loan that eats up more than two-thirds of one week's gross pay. And she's struggling? Of course she is. How did she get that loan in the first place?

In March, Ms. Gray, 35, received a $13,426.64 auto loan from Fifth Third Bank with a 17.72 percent interest rate.

Stop there. 17.72% interest rate. Meanwhile, my local Hyundai dealer ("We make the deals that other dealers can't make") is advertising interest rates below 1% (for those with sterling credit, of course).

[Ms. Gray] bought a 2009 Hyundai. But five days later, Santander Consumer told her that her loan was “now owned by Santander Consumer,” according to a letter from the lender reviewed by The Times. Ms. Gray, who has been taking online college courses, says she plans to use her financial aid money to catch up on missed car payments.

And when her financial aid money comes due? What will she have to do then?

Americans are so dependent on their cars that investors are betting that they would rather lose their home to foreclosure than their car to repossession.

Or in the words of a Santander Consumer investor, “You can sleep in your car, but you can’t drive your house to work.”

I have no words.