The Big Deal With Bad Car Loans | subprime auto lenders
According to a Consumer Reports review of regulatory filings and legal documents, these methods sometimes begin with lenders working with dealers to reward cars sold to low-income borrowers more than those sold to customers with better credit, or convert them into more expensive ones They can’t afford to sell cars. The lenders are also accused of structuring the loans and their agreements with the dealers to guarantee a profit even if the borrower defaults, the attorneys general say.
And when borrowers default, as they often do, lenders work aggressively to collect debts through foreclosure and wage garnishment, claims CR’s reviewed documents say.
“It appears that there are some lenders with a business model that expects, maybe even desires, some level of redemption,” says Pamela Foohey, a professor at the Benjamin N. Cardozo School of Law in New York City. which has published several studies on car lending.
In the third quarter of 2021, Credit Acceptance and Santander reported net income of $250 million and $763 million, respectively, in the trailing three months.
In other words, underwriting bad loans is good business.
But it’s a dangerous model for consumers with low credit scores. Sky-high interest rates, often with maturities of 72 months or more and monthly payments that eat up a significant portion of their income, make default likely.
And when that happens, lives can be turned upside down. When a person’s car is impounded and their wages and tax refunds are forfeited, a vicious cycle begins that makes it harder for them to rebuild credit, keep a job, or pay rent or other bills.
Santander declined to comment on CR’s specific questions about the allegations, but said in a statement that it is a “responsible lender” operating in a highly regulated environment.
“We treat our customers as individuals and strive to find sustainable financing solutions that are appropriate for a wide range of income and credit ratings,” said Laurie Kight, a company spokeswoman. “When customers default on payment, we try to offer options to help them service their vehicle, including loan modifications and payment deferrals, as repossession is always a last resort.”
Credit Acceptance also declined to comment on specific questions about ongoing legal cases, citing company policy.
“Credit Acceptance has been in business for nearly 50 years because we offer financing programs nationwide through auto dealerships that enable credit-strewn and credit-unseen consumers to purchase vehicles and build or restore their creditworthiness,” the company said in a statement to CR.
“We were pleased to settle the allegations by the Massachusetts Attorney General and the Mississippi Attorney General in 2021 and are proud to continue serving clients in those states through our financing programs.”
Josh Lauer, an associate communications professor at the University of New Hampshire who has written extensively on the credit-score industry, points to the development of credit scores – something that has a major impact on auto lending — as a double-edged sword. Because of the credit rating, more people can get access to credit, but for some, these credits can be a financial disaster.
“It helps unethical lenders identify the most vulnerable borrowers and then take advantage of them,” Lauer says. “Most lenders are probably trying to make money, but doing so in an ethical way.”