Remember the subprime mortgage crisis? Thank goodness that's over, right? Well, hold that thought, because subprime loans are still an ongoing nightmare, only now the culprit is something America loves — and relies heavily upon — our cars. An incredible 86 percent of Americans commute to work by car, John Oliver said on Last Week Tonight, and people who don't have their own automobiles also miss out on job opportunities because of their immobility. Bottom line: Most Americans need a car. But even those of us who can't afford one, know a lack of funds is no excuse for not owning a car — not when a bazillion car-loan lenders are out there vowing they’ll approve anyone, no matter how poor their credit.
While tearing apart auto-loan lenders that prey on people who can't afford a down payment, and don't qualify for a reasonable interest rate, Oliver's message was consistent: If it seems too good to be true, it is. It's bad enough that many people who have declared bankruptcy seem to get slammed with mail from car loaners actively targeting them. Once they agree to visit a used-car dealership and try to negotiate the purchase of a car, they often end up agreeing to pay anywhere from 19 to 29 percent interest rate, and that's in addition to any add-ons that inflate the price of a car.
Just to give some idea of how a deal like that can truly hurt a person in the long run, Oliver played a clip showing a woman at a used-car dealership who agreed to a 29 percent interest rate. By the time her loan was up, she would have paid $13,000 for a car that was worth only about $2,000.
Now, let's say you can't afford a monthly payment and fail to cut a check one month, here's where things take a turn for the dystopian. Some car dealers can install a device to your car that starts and continues to beep from the day you miss your payment. Should you fail to send in your money, the device can then lock your car so that you can't start it. Imagine being that mom on her way to drop off the kids in the morning at day care before a journey that takes 40 minutes by car and 2 hours and 40 minutes by bus. Literally, a rude awakening.
Car dealerships can also repossess your car, even if you're a few days late, Oliver said, and once they do, your nightmare isn't necessarily over yet. The dealer doesn't have to refund your down payment, can say you still owe them money after repossessing your car, and can even sell it to allow the whole vicious cycle to begin with someone else — with your car. In the meantime, you've already blown a wad of money on a car that's who-knows-where now, and you've been left owing thousands of dollars in debt.
Behind closed doors, some lending industries are admitting conditions are deteriorating, Oliver said. And, even though news that used-car dealers are predatory is not new, they’re getting more aggressive and taking more risks. This has some people worried that the bubble might burst and we could experience financial repercussions not unlike what we saw during the U.S. housing mortgage crisis in 2006.
Despite a surge in subprime auto loans, experts say these loans cannot be compared to mortgage loans, and that we need to remember that cars and houses are apples and oranges. Even though auto loans to people with poor credit have increased 150 percent over the last six years, they comprised about 22 percent of overall auto loans. Also, the right to instantly repossess a car pretty much the day after you miss a payment may prevent this from becoming a problem that more seriously affects the overall economy.
Either way, it's difficult to not feel the injustice of an industry that feeds off of the misfortune of others — which is exactly what's happening when a car-loan lender promises the sun, moon and stars for no money down, and then proceeds to royally screw over the buyer. As for the buyer's responsibility in all of this, yes, we all need to do our homework so that we don't fall into money traps when making big purchases. But if it comes down to owning a car and having a job to pay for food, bills, and way too much for the said car, chances are most people will feel their hands are tied. And that's exactly what predatory lenders are counting on.
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