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Auto Loans Steer Into Murky Subprime Territory

Is it the next subprime scandal? Banking giants piling into high-interest auto loans for the poor. We’ll investigate.

Mike Johnson, a sales manager at a local Honda car dealership, walks past a row of Honda CRV SUVs Tuesday, Dec. 2, 2014, in Tempe, Ariz.  (AP)

Mike Johnson, a sales manager at a local Honda car dealership, walks past a row of Honda CRV SUVs Tuesday, Dec. 2, 2014, in Tempe, Ariz. (AP)

America’s “two-tier economy” is the headline on page one of The Wall Street Journal today.  At the top, booming.  At the shrinking middle and bottom, in trouble.  The New York Times digs on in.  To how some of the richest financiers in the country are profiting – profiteering, some say – off the basic needs – sometimes desperate needs – of the poor.  Like the need, in this country, to have a car to get to work.  There’s a new subprime boom in very high interest rate lending for used cars.  Big profits at the top.  Trapped borrowers at the bottom. This hour On Point:  investment riches from subprime auto loans to the poor.

— Tom Ashbrook

Guests

Jessica Silver-Greenberg, reporter for the New York Times‘ Dealbook. (@jbsgreenberg)

Michael Corkery, reporter for the New York Times‘ Dealbook. (@mcorkery5)

Chris Gillock, managing director of Colonnade Advisors, LLC, in Chicago.

William Black, associate professor of economics and law at the University of Missouri – Kansas City. Author of “The Best Way To Rob a Bank Is To Own One.” (@williamkblack)

From Tom’s Reading List

New York Times: Investment Riches Built on Subprime Auto Loans to Poor — “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.”

Bloomberg News: Honda Warns Against ‘Stupid’ Auto Loans Driving U.S. Sales Gains — “Sales will keep growing as the Federal Reserve’s zero-interest-rate policy encourages investors to collect yield from auto loans, said Tom Webb, chief economist at Manheim Consulting. While not in a bubble, the industry is taking on more risk by extending longer loans with smaller down payments to buyers with blemished credit scores, he said.”

Detroit Free Press: Long-term car loans popular but pricey in long run — “About 40.3% of new car loans ranged from 61 months to 72 months in October and November, according to Melinda Zabritski, senior director of auto finance for Experian. And 25.7% of new car loans ranged from 73 months to 84 months based on preliminary fourth quarter data. Much of the growth has been in the 73-month to 84-month range, which had been just under 10% during the recession and slightly above that during better days, according to Experian.”

 

 

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