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from the scorn-the-poor-man-as-a-thief-in-country-and-in-towne dept.
Auto loans to borrowers considered subprime, those with credit scores at or below 640, have spiked in the last five years with roughly 25 percent of all new auto loans made last year subprime, a volume of $145 billion in the first three months of this year. Now the NYT reports that before they can drive off the lot, many subprime borrowers must have their car outfitted with a so-called starter interrupt device, which allows lenders to remotely disable the ignition. By simply clicking a mouse or tapping a smartphone, lenders retain the ultimate control. Borrowers must stay current with their payments, or lose access to their vehicle and a leading device maker, PassTime of Littleton, Colo., says its technology has reduced late payments to roughly 7 percent from nearly 29 percent. “The devices are reshaping the dynamics of auto lending by making timely payments as vital to driving a car as gasoline.”
Mary Bolender, who lives in Las Vegas, needed to get her daughter to an emergency room, but her 2005 Chrysler van would not start. Bolender was three days behind on her monthly car payment. Her lender remotely activated a device in her car’s dashboard that prevented her car from starting. Before she could get back on the road, she had to pay more than $389, money she did not have that morning in March. “I felt absolutely helpless,” said Bolender, a single mother who stopped working to care for her daughter. Some borrowers say their cars were disabled when they were only a few days behind on their payments, leaving them stranded in dangerous neighborhoods. Others said their cars were shut down while idling at stoplights. Some described how they could not take their children to school or to doctor’s appointments. One woman in Nevada said her car was shut down while she was driving on the freeway. Attorney Robert Swearingen says there's an old common law principle that a lender can’t “breach the peace” in a repossession. That means they can’t put a person in harm’s way. To Swearingen, that would mean “turning off a car in a bad neighborhood, or for a single female at night.”
(Score: 3, Insightful) by MrGuy on Friday September 26 2014, @03:55PM
Any loan that ends in repossession (be it a mortgage, a car loan, a small business loan, or any other property secured loan) is virtually always a loss for the lending company. Lenders want to avoid loans going bad. They also want to make a return on their investment, when factoring in such a risk.
So, how SHOULD someone with money they potentially want to lend approach loans to sub-prime customers (where there's a significant repossession risk)? One option is to avoid it entirely. This is not ideal - it would mean no one with imperfect credit could get a loan (many people couldn't get a mortgage in the wake of the financial crisis, even if they had "decent but not perfect" credit, because lenders were afraid to take on any risk). For lenders to lend to riskier borrowers, they need a reason.
One reason would be higher returns, which they definitely do charge - sub-prime borrowers pay huge premiums (TFA quotes a 29% APR rate as not-uncommon, where a good buyer purchasing a car at the right time might pay as low as 0%). The high rates cover the lenders' likely losses making these loans when SOME customers eventually default.
This device, by making "keep the car payments current" a higher priority than "keep other bills current," will reduce the risk to lenders (if it truly can cut the late payment rate by ~75%, as claimed in TFA, that's a HUGE reduction), then lenders shouldn't command such a high risk premium. Less defaults means less risk to charge for, so in principle they could cut sub-prime lending rates, and more people will be able to afford to purchase cars, which in general is good (especially for people who can responsibly manage payments if the interest rate were lower). It will mean more demand (and so high resale values) for everyone who owns a car when they sell it used. Society could, in theory, benefit from this result (at least when we only consider that "car" market portion of the economy).
That said, the other option is for the lenders to simply pocket the proceeds - reduce their risk and still keep charging the same rates. Then the lenders benefit and nobody else.
In theory, EVENTUALLY the savings SHOULD trickle down - if I can reduce my interest rate by 3% and double my business at the expense of competitors, eventually (in theory) SOMEONE will make that move. How long that takes depends on a lot of factors (and implies a largely frictionless market for sub-prime auto loans, which is questionable for multiple reasons).
The other factor to consider here is that, if a device like this forces people with limited means who have to choose which bills to pay to favor car payments, which OTHER payments are going unmade so that this one can be made? I'm sure every lender would LIKE to be "top of the pile" of bills to pay, but eventually there's a decision to make, and by moving themselves to the top of the pile, auto lenders are pushing everyone else down, and pushing someone else "below the line" of "can't make that this month." It's debatable whether this is a good thing (preventative medical care. for example, would be a terrible thing to have going unfunded to pump up auto lenders...)
(Score: 3, Insightful) by scruffybeard on Friday September 26 2014, @06:17PM
I think it is safe to say that most people, even of decent means have already pushed preventable medical care to the bottom of the stack. Even now with subsidized policies, I hear too many people talk about how they can't afford a policy, all the while getting their nails done every week, with a daily Starbucks habit, an iPhone 6, driving a brand new car. There are a great many people with true hardships, however there are far more people with messed up spending priorities that are putting companies in the position of competing for the "top of the pile".