U.S. Subprime Auto Loan Losses Reach Highest Level Since the Financial Crisis

https://www.bloomberg.com/news/articles/2017-03-10/u-s-subprime-auto-loan-losses-reach-highest-level-since-crisis

by uptown • 9 years ago

114 95 9 years ago

pecord• 9 years ago

I 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

Arizhel3• 9 years 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• 9 years ago

By financing people with bad credit for extremely high rates.

vkou3• 9 years ago

Interest 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)%.

drspacemonkey2• 9 years ago

I was under the impression that those were introductory teaser rates that balloon up later, just like what happened with subprime mortgages.

djb_hackernews• 9 years ago

Indeed. 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.

trendia2• 9 years ago

I can see how auto dealers sell debt (by offering loans), but how do auto manufacturers do so?

js22• 9 years ago

I just bought two new cars, a Chevy Volt and a Mazda CX-9. The dealers couldn't care less how I was going to pay, nor whether I purchased or leased. They barely even tried to sell me extended warranties.

In fact, Mazda gave me a $500 incentive to borrow at 0% for 5 years. My GM loan was also 0% (but no incentive). So obviously they aren't making anything loaning me money.

Further, I find it hard to believe there's no or slim profits in the sales. I think I did a pretty good job negotiating. I don't even mind disclosing the numbers.

The Volt had an MSRP of $40,325. I managed a $38,258.25 sales price + $1147.75 tax + $94 tag less $1000 rebate for $38,500 out the door. The invoice on this car is supposedly $38,651.

The CX-9 was a similar situation, with an out the door price below invoice.

Both dealers I purchased from were in fact a bit out of town and had to secure the vehicles from other area dealerships. They knew I wasn't likely to use their service departments (each is almost an hour away), so I doubt they cared about any more than making the sale. The sale alone has to have been profit motivated.

Now, maybe individually they didn't make a lot of money on these sales. But it has to be the case that they are making money on their total sales volume. Maybe they'll take a loss on a sale or two if it puts them above a quota which gets them a huge bonus.

These dealers are obviously costly to operate. They have a lot of real estate and the show rooms are beautiful. They hold a ton of inventory for months at a time. I just can't believe they could exist on the slim margins they claim they make on each sale. I would be shocked if they aren't easily clearing 20% or more on average on sales alone, even on deals like mine.

majormajor• 9 years ago

I haven't experienced this, I've actually had good luck doing basically the opposite. Go in with quotes already from my bank/credit union(s), tell the dealer "if you can beat 2.2% [or whatever] I'd be interested in your financing", let them decide if that's worth it to them, but still negotiate bottom-line total dollar amount, not monthly payment, as if paying cash (since outside loan = cash, to them).

Shivetya• 9 years ago

Being 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• 9 years ago

I 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.

sixQuarks2• 9 years ago

I 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.

user59944612• 9 years ago

Prices 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.

RickS• 9 years 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.

X86BSD• 9 years ago

I'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• 9 years ago

A 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• 9 years ago

Why 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• 9 years ago

Thinking about it, even margin loans would probably be better. This is still not as bad as doing it on housing though.

darawk3• 9 years ago

Why 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• 9 years ago

Wasn't there a problem with the ratings agencies failing to do their job properly?

drspacemonkey2• 9 years ago

One of the biggest issues with the housing market collapse was that the size of the fan wasn't known until it met the shit. There was a LOT of "safe" money invested into mortgage-backed securities. Even people who knew the shitstorm was coming could only guess at how far-reaching the problem would ultimately be.

And just like last time, if "too big to fail" institutions start going under, they'll get bailed out again because no politician wants the economy to collapse on their watch.

1001101• 9 years ago

So they can be sold to charities and pension funds, aka "muppets."

arrty88• 9 years ago

How do you fix the brainless buying? Make pensions great again.

aianus• 9 years ago

This is why I'm against company or state pension funds. It's the worst form of the principal agent problem where you can't choose the agent, you're obligated to keep giving him money, and you can't switch to a different agent or get your money out for decades. Horrible incentives.

fredgrott• 9 years ago

same could be said for corporate debt as well as its the same financial instruments and structures..

fixxer2• 9 years ago

While 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.

guelo• 9 years ago

It's a macro risk if large banks are so overexposed that they can fail. Otherwise it can be contained.

fixxer2• 9 years ago

Only bank I know of with really risky auto practice is perhaps Santander. The world will keep turning.

lefstathiou• 9 years ago

Selfish 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

wheelerwj2• 9 years ago

i 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• 9 years 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.

refurb2• 9 years ago

that will almost always retain a significant portion of the original value.

Is that true? Home values dropped 50%+ in some areas during the housing crisis. And when you're talking about a several hundred dollar home, that adds up quickly.

Cars have the disadvantage that they depreciate, but if you can repo them quickly enough, the losses can be contained.

And as someone else mentioned, cars are mobile, so if you repo one in California, you can always move it to Washington if it sells faster.

ams61103• 9 years ago

Nobody will finance a 20 year old car (outside of specialty collector markets).

Even 72, 84 months is insane. If you need to finance a car for that long to afford the payments, you need to buy a cheaper car.

brigade2• 9 years ago

Do you actually believe that even a quarter of people taking out subprime loans could afford to replace their car with Uber, assuming it's even available where they live?

Second, yes homes can't move, but the legal process you need to go though to evict, repossess, and resell a house is long and expensive. With a car, a repo guy needs just 5 minutes in a parking lot and the car's off to auction next month. Between automatic license plate readers and GPS trackers (for the absolute bottom tier), nowadays they're quite likely to get their chance well before a delinquent mortgagee would be evicted.

Retric• 9 years ago

Sub prime Auto loans like subprime CC also have much higher interest rates so they can absorb far more defaults. Further, the loans are not nearly as long so if someone makes payments for 4 years much of the principle has already been recovered with 15% interest rates.

uep• 9 years ago

John Oliver had a segment on subprime lending back in August:

https://www.youtube.com/watch?v=4U2eDJnwz_s

According to the video, there was a 31.45% default rate in 2015.

jgalt2123• 9 years ago

Yes, but even at that high default rate you can make the math work. 100-31.45 X 1.15 = 78.83

so if you can sell the $31.45 worth of repo'd cars for more than $21.17 (100-78.83), you have broken even. 21.17/31.45 is 67% recovery rate. high, but doable for sure. even more so when you consider loans with 31% default rate probably have loan rates much higher than 15%

jgalt2123• 9 years ago

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

Also, it's a lot harder to repossess a home (i.e. foreclose) than it is to repo a car. Although, some of these advance repo methods are coming under closer scrutiny.

https://www.bloomberg.com/news/articles/2017-03-06/another-a...

koreyb3• 9 years ago

Assume you were referencing subprime home mortgages. I could be wrong. People are more likely to default on a subprime auto loan.

31.45% vs 8.96%

http://www.sgcaccounting.com/Resources/BHPHBenchmarks2015.pd... https://www.mba.org/2015-press-releases/may/mortgage-delinqu...

Source: sell BHPH software, work with DriveTime.

imgabe• 9 years ago

I 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.

U.S. Subprime Auto Loan Losses Reach Highest Level Since the Financial Crisis

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