During my time consulting with three different franchise car dealers I saw many of these loans written – and people sign for them – that should have never been made. They’re especially common in used vehicle sales situations. They also typically are given to people with poor to bad credit (they’re sometimes known as “bad credit auto loans”) and feature double-digit interest rates running anywhere from 12 percent to whatever the maximum allowable interest rate is in the state in which the loan is originated. The default rate on these loans has always been higher than the rate at which prime-rate loans default, sometimes much higher.
“At the time I got it, I did some numbers in my head, and I thought I could make it work,†he said. “I thought it was a little high… but right now it’s the only place that’s willing to give me a chance to get a car. So I said, ‘I’ll make it work.’â€
Woodrum put his $4,000 down that day. But in the end, thanks to the double-digit interest rate, the loan agreement called for him to pay a total price of roughly $45,000, more than double the car’s original price, for a seven-year-old Dodge Ram with 66,000 miles."
The above situation is quite common in the auto sales world. They need a car or truck and many are willing to take on a loan for a vehicle that’s likely not to outlast the loan term, for one. Plus, people taking these loans on are usually amenable to paying for an extra-cost extended warranty, loan protection insurance and so forth.
It’s no wonder that someone two or three years into a loan that has another three or four years to run, on a vehicle with miles typically north of 100,000 and looking at a never-ending series of repair bills that they’ll end up covering fully, because the extended warranty ran out, frequently wash their hands and simply default, taking a chance that they’ll never have to repay the negative balance once the repossessed vehicle sells at auction.
That opens up another problem for them, though, because that balance is often bought by debt brokers who then sell the “paper” (the loan) to collection agencies that specialize in trying to turn that “bad paper” into “good paper” through the legal system (via court-issued judgments and the like). Cavalry SPV is one of the bigger buyers of such bad debt, and they’re aggressive about dragging these folks into court – or getting them to agree to repayment terms on their own.
How Subprime Car Loans Are Ruining Lives And Repeating The Mistakes Of The Housing Crisis
