Observations on life

Car sales booming, but at what cost❓

Here’s a bit  of news; auto sales aren’t booming because of the economy, but rather because of increased lending and subprime lending at that. Sound familiar⁉️

Sko­pos sold its first bond deal backed by pools of sub­prime loans in April. The compa­ny’s sec­ond deal was the November trans­ac­tion, which raised $154 mil­lion. The bonds are backed by more than 10,000 loans, with terms av­er­ag­ing 5.6 years and in­ter­est rates of about 20%.

Some 87% of the loans were to borrow­ers with credit scores be­low 600, on a scale of 300 to 850. A third of those had scores be­low 500 or no credit scores at all.

Source: Subprime Flashback: Early Defaults Are a Warning Sign for Auto Sales, WSJ 3-14-16

No doubt there are some people who actually need a new car, for many people a car is a necessity. For others a new car may be desirable; something other than basic transportion is a luxury. Think what these folks are actually paying for a vehicle over five plus years at 20%. A $28,000 loan will cost $46,379 with payments of $703 per month. 

By the way, the top three selling vehicles in 2015 were trucks, for non-commercial buyers probably not in the necessity class. 

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2 replies »

  1. The bankers do not care about sub prime loans defaulting, at least there is a car to repo and are going to make as much as they can off stupid people. They know in the end if things go wrong they will just get the government to bail them out again.
    Or write off the losses against profits on the loans that stay current. So, the taxpayer loses out again with lost tax revenues.

    I read the article and 85% of the loans are current, so if that holds for the entire time the cars are financed it should work out ok.
    I have a friend who did a 17% auto loan and after a year of no missed payments, he was able to refinance with a local credit union at 8%.

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  2. I do not blame the dealership or the bankers for this one. The lenders have priced in the risk at 20% rate. I blame the buyers who just want too much and more than they can afford. If the dealers didn’t sell them a new car that might last the length of the loan, the buyers would buy a used car at a pay here car lot at 20% or more interest if they truly needed a car.

    I bought my first car in 1982 at 18%. The monthly payment was about 20% of my monthly income at the time and I was still living at home. To put it in perspective, mortgage rates were racing up to and over 14% at the time. So my car loan was only about 4-5 points over a mortgage, not the 16 points that a 20% car loan is today. A 20% car loan just screams bad deal or bad credit. Once again this shows the need not for free college but a year of personal finance education in high school.

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