12 ms·
U.S. Subprime Auto Loan Losses Reach Highest Level Since the Financial Crisis
- pecord 10y agoI use to work on a CRM specific to dealerships and I cannot say I am surprised. There is so much data on cars and what their worth (KBB, truCar, etc) nowadays it is tough to make much of a profit on the car itself. Most make their money in the finance or service department. It was not uncommon for a loan to be 5-6 years long or for a buy-here pay-here play to charge up to 25-30% APR
- Arizhel 10y ago>Most make their money in the finance or service department. It was not uncommon for a loan to be 5-6 years long Yeah, but with the extremely low interest rates we've been seeing the past several years, how are they making money there either?
- stevenmays 10y agoBy financing people with bad credit for extremely high rates.
- Arizhel 10y agoSorry, but that makes no sense. The used-car dealerships giving people crappy high-interest loans are not affiliated (nor are their lenders affiliated) with the new-car dealerships giving people 0% loans. What incentive is there to give someone a 0% loan at all? There's no profit in it. The only way it makes any sense for the lender is if 1) they hope you'll forget to make a payment and then they can charge you fees, or 2) they're affiliated with the manufacturer, and being used to promote sales.
- massysett 10y agoOnly people with good credit are getting 0 percent. A new car dealer will happily find crappy high-interest financing for poor credit buyers. The finance guy has contacts with a dozen or more lenders. 0 percent brings in good credit buyers who might otherwise buy a different car, or who might just keep driving their old cars.
- Arizhel 10y ago>A new car dealer will happily find crappy high-interest financing for poor credit buyers. They will, but not necessarily with the same lender. Lender A giving out 0% loans is not getting money from lender B giving out 15% loans. >The finance guy has contacts with a dozen or more lenders. Exactly. So what's the incentive for bank A to lend at 0%? They're not going to see any of the profit that other lenders get. In fact, they're not going to get any profit at all, unless the buyer defaults early or misses payments. It seems to me that the whole 0% loan thing is a way for dealers and mfgrs to keep their inventory moving, and perhaps make money just on the regular mark-up of the car itself (which isn't much with new cars these days), and hope the buyer comes back for overpriced service.
- Spooky23 10y ago0% is a teaser rate from the manufacturer's captive financing arm. They only subsidize the premium, low risk buyers.
- Zachery 10y agoThey've increased the cost of the cars to offset the 0% rate. You should get a bigger cash discount to buy the car outright, instead of financing through them.
- gscott 10y agoMy wife bought a car from Carmax she has good credit they offered her a loan at 10%. She want through Farmers Insurance for a car loan at about 5%. At least in the case of Carmax they are doing high rate loans hoping people don't shop around for the loan.
- vkou 10y agoInterest rates on houses are low, but interest rates on vehicles are... Not so low. Besides, it doesn't matter what the prime interest rate is - the consumer rate is always (prime + markup)%.
- kbutler 10y agoEh. Subprime rates, maybe. But I've got two car loans, one under 2%, one under 1%. I feel like I should pay them off early on principle (as opposed to principal), but it would be foolish to divert investment funds to paying them off early.
- vkou 10y agoWith a good enough credit rating, and in tough enough times, you can get 0% loans, no payments for 12 months. Sometimes, the need to dump inventory outweighs the need to make money on loans. (Of course, if you miss a payment, that 0% rate will jump to 12%.)
- trendia 10y agoAssuming you can stomach the risk, if you can get a car loan for 1% and a market return of >1%, then you would be better off taking the loan, investing your money, and paying off the loan later.
- birdmanjeremy 10y agoReally? Both our cars are financed at < 2%. Cheap auto loans are all over the place.
- deleted 10y ago[deleted]
- drspacemonkey 10y agoI was under the impression that those were introductory teaser rates that balloon up later, just like what happened with subprime mortgages.
- djb_hackernews 10y agoIndeed. Auto manufacturers don't sell vehicles, they sell debt. I've heard this is a good reason to withhold that you are paying cash at a dealer until the last moment and work the best deal you can as if you are going to use their financing. They are much more interested in making a loan than making a sale.
- trendia 10y agoI can see how auto dealers sell debt (by offering loans), but how do auto manufacturers do so?
- cmdrfred 10y agoOften the loans are though the manufacturer. Example: https://www.toyotafinancial.com/ https://www.toyotafinancial.com/
- douche 10y agoThe US big three all have financial services companies centered on auto loans. https://en.m.wikipedia.org/wiki/Ford_Motor_Credit_Company https://en.m.wikipedia.org/wiki/Ford_Motor_Credit_Company https://en.m.wikipedia.org/wiki/GM_Financial https://en.m.wikipedia.org/wiki/GM_Financial https://en.m.wikipedia.org/wiki/TD_Auto_Finance https://en.m.wikipedia.org/wiki/TD_Auto_Finance
- slededit 10y agoIts interesting to note that GM Financial is a rather new addition to GM. They sold their original vehicle financing arm (GMAC) during their bankruptcy as did Fiat Chrysler.
- maxerickson 10y agoNow Ally: https://en.wikipedia.org/wiki/Ally_Financial https://en.wikipedia.org/wiki/Ally_Financial
- 10y ago
- Shivetya 10y agoBeing in the middle of a new car purchase this week really has shed the light on how bad some loans are. Just from overhearing deals to asking the sales person if what I heard was true was enlightening. While I did not hear anyone in that APR range one couple was working towards a 14.90 rate six year loan. Another was trying to roll over money owed on a new car but kept getting told no one would make that loan as the new exceeded the value of the new car by too much. Yet my salesperson told me they have customers they turned down and drive a new car to their dealership as if to brag they got it elsewhere. short story, too many people are just irrational about their purchases and have very bad reasoning. thinking a thousand extra interest is okay over a long term 84 vs 60 usually by factoring the extra across the whole period instead of the extra 24 which is more telling. Let alone taking 84 month loans!
- Clubber 10y agoI think those people think in terms of how much they can fit into their monthly income rather than how much the financing is going to cost them. In other words, if the person make $2000 a month and has $800 left over every month, a $500 car payment is ok and the 14% rate doesn't even enter into the calculation.
- deleted 10y ago[deleted]
- sixQuarks 10y agoI disagree on the supposed "transparency" in vehicle prices these days. That's what they want you to think. KBB has a separate (supposedly more accurate) pricing service specifically for dealers. There is also a ton of shady pricing tactics going on, from manufacturers that advertise bogus entry prices (on vehicles that are not really stocked at dealerships), to dealers that price vehicles with every incentive thrown in (which nobody actually qualifies for). You still have to do a ton of research to figure out what's going on.
- user5994461 10y agoPrices are incredibly transparent and accurate. Made money from buying and selling used cars a long time ago. The business flow died down slowly with the rise of the internet and car estimate sites. Ultimately people could just go to whatever-site, enter their car model and get an accurate estimate, corrected for year, mileage and maintenance tasks done. There ain't any car bought or sold for 10-20% under or over median value.
- refurb 10y agoPrices are incredibly transparent and accurate. My understanding is that dealer incentives aren't captured in those transparent prices. And those can add up to several thousand dollars. That's why if you go to a dealership and say "I'll pay your invoice plus $500", they'll gladly do it since they'll get $5,000 on the backend.
- user5994461 10y agoI used to deal in < 10k€ used cars. That's where there is the most flow. Note that Europeans have much smaller and cheaper cars than Americans. There never was room for a $5000 margin. The rare multi-k hit became rarer and rarer with the advance of the internet, until it completely disappeared.
- RickS 10y ago> KBB has a separate (supposedly more accurate) pricing service specifically for dealers. This is correct, in my experience. My credit union had a set of data that was supposedly KBB but had totally different info (and lower numbers) than the consumer website. They also capped their auto loans at 120% of that value, to account for dealership markup.
- deleted 10y ago[deleted]
- X86BSD 10y agoI'm shocked! Shocked I say! I've seen this coming for a decade. Dealers are practically giving the cars away with near 0% financing. Everything in the financial world has been a race to the bottom for a long time. You can say it started with the severing of the link to gold backed currency. The dollar has lost 97% of value since then, the fed pumps up one bubble after another, telecom, housing, auto, student loan, etc. The bubbles barely pop before they are inflated into a much bigger one in another sector. And they keep moving around the globe. The currency is the problem and the central banking. All currencies are circling the drain requiring more and more intervention and bubble inflating to stay alive. I'm quite certain I'll see all paper crash in my lifetime.
- hellogoodbyeeee 10y agoA broken clock is correct twice a day. I can't debunk your economic conspiracy theories in one comment, but I will make two points. 1) This article is talking about subprime loans. No one gives sub prime borrowers a zero percent interest rate because they are the riskiest borrowers. So by you using that as proof of a subprime auto loan crisis shows that you don't understand what is actually happening here. 2) You can't claim to be seeing a bubble occuring for ten years. I mean, I guess you can and you will be guaranteed to be correct on a long enough time line, but the point is it doesn't mean anything. There is an established business cycle. No one cares about an economic prediction without a timeline.
- frgtpsswrdlame 10y agoWhy do we allow the securitization of these loans? Securitization is just a way to move risk oversight and responsibility from the lender to the customer of the security.
- yuhong 10y agoThinking about it, even margin loans would probably be better. This is still not as bad as doing it on housing though.
- darawk 10y agoWhy wouldn't we? It's the customer of any financial product's job to do sufficient due diligence. That's like saying "selling stock is just a way to move risk oversight and responsibility from the company to the shareholder", every time the market dips. The only problem with the subprime housing crisis was that its sheer scale caused the government to have to step in, and almost caused the collapse of the banking sector. However, correct me if i'm wrong, but there's no such risk here. And as such, this is just some investors making a bad bet - which is perfectly fine and to be expected in the course of capitalism.
- pstuart 10y agoWasn't there a problem with the ratings agencies failing to do their job properly?
- claytonjy 10y agoThis was very much part of it; they were even incentivized to inflate ratings. I really liked the explanation in Nate Silver's Signal and the Noise; another big piece was that risk pools were not as independent as the people/institutions/models assumed.
- darawk 10y agoYes, there was. But that's a problem that can arise in any market. It's ultimately the buyer's job to do their DD. These car loan securities aren't being sold to retail investors - they're being bought and sold by pension firms and hedge funds. Sophisticated people that can and should do their own DD. Whether or not they do it is on them. There's no need for the government to step in here, because the only consequences are to the investors themselves, not the general public. The global financial crisis was a unique case, due to how widespread and enormous the size of the problem was. If these mortgage backed securities hadn't been so huge, it would have been a non-story about how some investors lost money by making a bad bet (i.e. what happens every single day on wall street).
- fixxer 10y agoWhile I'm not a fan of a looming crisis, I don't see enough critical mass to this space to have a lot of concern for macro impact. It is also worth realizing that while the great recession trained us to be scared of news like this, defaults are a sign of risk taking and not necessarily a bad thing. Case in point, YC tries to make good bets, but they have a lot of losers in their portfolio. And in that case, we're talking about unsecured debt.
- lefstathiou 10y agoSelfish plug here but this industry is our bread and butter (our company hosts the data rooms and powers the marketing for the vast majority of subprime auto backed securitizations in the US). Below is a link to issuance volume going back to 2008. You'll see that big banks are not the leading originators in this market and at peak (2016) we're talking $26bn in loans (versus hundreds of billions in subprime mortgages). Additionally, unlike mortgages on second and third homes, people are far less likely to default on a car rather than a home because in suburban America, you need your car to keep your job, regardless of where you live. Finsight Subprime Auto issuance profile: https://finsight.com/sector/Auto/Subprime%20Loan https://finsight.com/sector/Auto/Subprime%20Loan
- deleted 10y ago[deleted]
- wheelerwj 10y agoi think the point you are trying to make is that auto loans are safer but you failed to express two massive considerations: first, and foremost, mortgages are secured against a physical piece of property that will almost always retain a significant portion of the original value. in the recession, homes might have lost 60-80% of their value, but they all bounced back reasonably over time. in contrast, a vehicle loses a huge portion of its value immediately and by the time a car is 20 years old, its not even worth repossessing. second, homes can't move. you have a much better chance of repossessing a house than you do of repoing a car. finally, just for fun. your claim that people are less likely to default on a car loan because they need to work is taken out of context at best, or possibly is just plain incorrect considering the prevelance of ride sharing tools and public transit. People only need to keep their cars for work.... if they have jobs.
- ryanmarsh 10y ago> mortgages are secured against a physical piece of property that will almost always retain a significant portion of the original value. REO is incredibly costly and moving a house off the books cannot happen quickly especially in a down market. Cars are better in that way. Most people will be upside down in their car loan but there's an international market for cars. It's pretty easy to liquidate a used car and capture some capital in the short term. Try that with a $450,000 McMansion.
- imgabe 10y agoI wish they would put numbers in context. They say the losses of 9.1% are "the worst since January 2010" but they don't say what the worst losses were then. If it's 9.1% now and it was 10% then, then yeah we're pretty close to the worst ever. If it was 25% then or something it might be the worst since then but it's still not nearly as bad as the worst.