While the pending subprime auto loan bubble pop is nothing new for our readers, it may be a shocking revelation for the average American who would fall victim of these scams. British comedian John Oliver has prepared a video that places in evidence the rampant fraud that currently takes place in the auto lending sector. The similarities between this industry and the mortgage industry pre-2007 are striking.
The video compiles some of the current TV ads for the segment, including one from Viers Auto Sales, that should strike fear down your spine. Even a clown can get approved.
While the Obama administration has created the Consumer Financial Protection Bureau, we have yet to see any action from them or other social justice warriors like Elizabeth Warren on cracking down on these predatory practices.
Some of the video highlights include:
- A woman asking for a maximum $3,000 car loan ends up on the hook for a $13,000 loan (paying ~30% interest).
- A car who leaves her baby in the car, and then gets her car repossessed with said baby inside.
- A 2003 Kia Optima car that gets loaned and repossessed at least 8 times, each times valued at 2-3x its previous estimate.
- Approximately 31% of subprime auto loans are currently non-performing
Evidently, we have learned nothing from the 2008 crisis.
What is being sold in the securities market is a stream of payments. This could be a mortgaged loan, a car loan, a student loan, a credit card debt or anything else that has periodic payments.
These streams of payments are then used to repay term debt of all sorts, as an option to using the tax base. Either way, businesses will find their way to the cash they need, and will take the one with the least cost to them.
The stream of payments they are purchasing are at (say) 19%, and then they are using these same payments to collateralize debt they are purchasing at (say) 5%. They then capitalize on the difference.
Investment banks (otherwise known as the ‘capital markets’) are buying and selling cash. They are both lender and borrower in the same transaction and are hoping to make their profit on the ‘spread’ between their lending-rate and their borrowing rate.
This is a highly simplified explanation of how our investments and securities markets work, but it does expose that in the end, this ‘capital’ is provided by the only source it can be produced by: the laborer. Value (in every marketplace except for the capital market) is produced only by human toil.
And once more, we blame the borrowers (not the lenders) for their mistakes and celebrate the greed of the market players by providing lavish lifestyles and legal protections.
Stupid people do stupid things.
I thought the fundamental difference in subprime today versus old school was the lenders today bundle these loans into securities to sell on Wall St. (just like Countrywide, et. al. did with real estate mortages). Prior to this scheme buy-here pay-here was a shell game of get the biggest down payment, then repo the car when they miss a payment, sell the contract to some collection company, then resell the tired iron to some other shmo.
Please correct me if I’ve missed something.
I know a guy driving one of those 10 cylinder Dodge (warning label right on the front) trucks. He’s paying 26% interest on it too. Says it impresses his friends. Bitches because he can’t afford the gas or tires or insurance or repairs. Mows grass for wages to make a living. He’s in his mid forties and recently had his mommy accompany him to a tattoo parlour to get his first tattoo (which he can’t afford).
I fail to see how any of this is the lenders fault but it’s definitely not the borrowers fault. Nosiree Bob! The borrower clearly has his shit together. We celebrate the borrowers personal responsibility by paying them welfare and paying them to breed.
We scorn the sub-prime market but the Derivative Market is a billion times bigger and more risky TO US (but not to the Derivative Players who made the rules to grant themselves Safe Harbor: first dibs on all assets…like YOUR CASH/ASSETS of the failed bank, insurance/investment company, etc).
Ok, I worked as an independant mechanics shop integral to the buildings housing 2 buy here pay here dealers. This does not even begin to touch on all of how this scam operates. It would take pages to explain it, the private auctions, fuck all. Ideally, car you buy breaks dow. You refuse to pay. Car repoed. Sold at private 3 dealer auction of friends in the same business. Car sells for 25 dollars. Judgement is taken against you for balance. Rinse, repeat with new owner. The owner of sterling would get 2 to 3 checks a day from the estates of dead people he had won judgements on years prior. Years. The owner wins the lottery, you get a check. Disgusting. I made great money there but I had to fold the shop as 90 percent of the business was these dealers with their desire for 90 day fixes on bad junkyard grade cars we were burying these poor people in. We are talking epoxying cracked engine blocks. More stop leak and stop knock, tranny tune anti squeal repair in a can than I can forgive myself for. They would sell cars that literally did not run.
It is, to me at least, morally wrong to take advantage of stupid and or ignorant people just because you can.
I agree with you morally but nature doesn’t favor the weak or the stupid. There are two parties to these contracts and I’d bet a majority of the “poor ignorant people” are master Jedi’s at plying the welfare waters and skirting the law. THey know right to the penny how much their entitlements are and what day it appears in their account. They also know the phone number to call when shit ain’t right!
It must be awful to be hunted down and dragged back to a dealership where they force you to sign the papers before stuffing you into a brand new car and forcing you to drive off the lot. I am amazed that there aren’t legions of people lined up at the front desk of local PD’s all across the nation, demanding that justice be served.
Predatory infers that these people are victimized against their will and that’s simply not the case. The same people we are told day in and day out are fungible suddenly become a class of helpless naifs as soon as they get behind the wheel of a new car. They have the mental ability to handle the myriad tasks associated with driving an automobile, but not the capacity to figure out if they have enough money to pay for it?
Okay, whatever.
Everything, and I do mean everything that originates from the MSM should automatically be treated as a falsehood.
When I was 16 I spent a summer working as a gopher at a used car lot. Boy was that an education (probably more valuable than anything I learned in college.) As mentioned above, this guy would go to auction, pick up a car for say $250. Pay me minimum wage (cash) a couple hours to put a shine on it. He also had a mechanic who could fix any piddly problems, swap tires, etc. The car would then go on the lot for $500-1000 cash + $50/mo. As soon as the car was driven off the lot, he was well in the green. Invariably the buyer would miss a payment or two, and he’d repo the car. The car would then either go back on the lot or back to the auction. Rinse/repeat. It was mostly cash business, and he printed the money.
Sounds like you were working at Wormwood Motors – Danny DeVito’s character from the movie Matilda.
I saw that earlier this week, he makes good points and parts are funny (like literally only needing a pulse) but i am tired of the media making every stupid negroid who gets duped by anyone with an IQ higher than 45 a victim. Maybe they are a victim, of their own dogshit dna.
Oh this lady has 3 kids and no car to drive to work you say. Her husband must have a car they can share, right? Not married, you dont say…
Guess what, life is hard, especially when you are stupid. Just ask bb, he knows better than most.
Want it fixed? tell people when they are being stupid and dont bailout or backstop the banks. The shit would get fixed right quick.
These comments make me sad I sold my 1998 Honda. I could’ve set up my own used car lot with a single vehicle.
I’ve said this here before…We had a local car dealer that was running ads that stated hoe they were able to get someone a brand new Camaro with a 520 FICO score with…wait for it….No Money Down ! A friend who works at a dealership says they are offering loans with terms up to 120 months. Holy Crap…ten years to pay off a vehicle !
My neighbor bought a 4 year old pick up for 32K . 32K and he rents the house he lives in. Crap for 32K he could have bought land !
I drive a 2003 Corolla back and forth to work with 600K miles . It runs great and it’s only cost me 600 bucks in repairs on the almost 14 years I’ve owned it.
My wife drives the new Camry .
I do not own a vehicle that was built in this century. The truck and car both run fine, they pass their annual emissions tests and have had minimal repairs outside of routine maintenance. Both Fords and bought them both used in the late 90’s.
It all comes down to making a decision to live within your means, buy what you can afford at the time you need to. Doing anything else is just pissing money away. If you have extra money to piss away fine, if not, why do it.
The book Millionaire Next Door has a nice chapter about buying vehicles, good advice.
Used Cars, starring a very young Kurt Russell, is a pretty funny movie if you haven’t seen it check it out.
Fifty bucks never killed anyone…
If that fat woman who had to spend 2 hours on public transportation for 10-15 minute commute rode a bike instead, she could save time and lose weight at the same time!
The difference between subprime auto lending and the mortgage crisis are night and day.
1) The slimeball lenders are making a killing on this racket, not going billions in the hole
2) As it has been made clear, they make even more money when the customer defaults
3) Cars can be easily repoed and resold with little or no loss, unlike houses
4) It has been documented that people will pay on their cars in preference to their mortgages, when forced to make a choice
So this is an issue of immoral, predatory lending that needs to be better regulated. It has very little prospect of turning into any sort of financial ‘crisis’.
Bob said:
“So this is an issue of immoral, predatory lending that needs to be better regulated.”
This is what I was talking about yesterday……..Bob, either because he cannot or will not “regulate” himself wants the govt to create or continue another bloated bureaucratic office staffed with overpaid morans to do it for him.
How about you regulate yourself? How about you teach your family and friends to regulate themselves? The only reason predators succeed is because of lots of easy prey. Life is tough, it’s tougher if you’re stupid.
People aren’t foolish enough to fall for that kind of thing, are they!? All you need is basic math, like addition, multiplication….Wait…Damn it!
I used to work as a collections manager at a finance company. We charged about 28.74% for an average 4 year loan from anywhere from $1,000-$12,000. All the interest was computed to be paid on the front end, so even after a year of payments, customers still owed the majority of their original amount they borrowed. With the high interest + 48 month repayment terms, the company could count on doubling it’s money.
95% of my customers were great and paid their loans off. If someone became “payment troubled” we would bend over backwards to work with them, after all the late fees would hike their interest rate on the loan to nearly 40%! The more they fell behind, the higher the late charges and the more money we would make. Auto loans were “iffy”. If they had not laid a significant amount cash as a down payment or had a decent trade, the manager was very leery of lending any money to a potential customer with no skin in the game. Our best auto loans were in the $3-5,000 range since these people only needed basic transportation and a way to get to work.
The 5% of customers who went bad usually were overwhelmed by debt and developed a bad attitude towards the lender. However when they refuse to pay, it’s often impossible for them to get back on track and return to good standing. They blame the lender for lending them money, when in reality, it is their bad habits like going to the casino or racetrack or smoking weed and boozing it up for their inability to pay. After squandering their money on their guilty pleasures, the lender is the last in line on list of priorities.
The downside for the customer is that once they stiff the lender, their credit is shot for 7-10 years and no one will touch them with a 10 foot pole! Heck, even borrowing from a finance company or subprime lender will ding your credit! The slimeball salesmen at these used car joints blow smoke smoke up their customers butts by focusing on the payment that they can “afford”. Apoor person does not “need” a brand new car!
it all comes down to the interest that you pay and how that interest is computed. Get simple interest loans ALWAYS and chunk it down as fast as you can! If you need a car, buy one that is older and in good shape and stick with a budget. There is no reason you need to buy a $12,000 car when a $5,000 car will do the same job. Just be sure you have a mechanic check it out and tell you what the car needs to operate safely.
I love theburningplatform.com because it has a wide variety of articles on many different topics and the website always is looking out for the people who want to prey on us. Well, that’s my input. Thanks for reading my comment.
Darrell,
The picture you’ve painted is one very familiar to me, as is the picture painted by most of you who describe a transaction as involving a borrower and a lender.
The truth is far more grim.
I agree with you, when I was in the direct-lending part of the business, a 6% bad-debt portfolio is ‘healthy’. It meant the manager was not afraid to lend.
I agree also that most loans are based on a monthly compounded basis, so the bulk of the interest is paid up-front while the capital portion is higher. But that’s just math.
The simple fact is that these loans are already bundled-up and sold as ever riskier securities; the basis and collateral that allows even larger securities dealers (i.e. the shadow banks, governments, private investment capital firms, derivatives dealers, etc) the access to low-interest cash that they lend-out..
Most of you missed that part.
When the bubble collapses, the bulk of the risk lies not in the individual lenders and far less of the toxins are the fault even of the borrower. The large and complex schemes that render worthless I.O.U’s as valuable as any other assets is what is to blame.
When it falls apart, it falls apart hard!