

Subprime loans already being abused again, this time to push car sales - ck2
http://www.nytimes.com/2011/02/28/business/28autos.html

======
functionoid
Banks have money, thanks to the government. And they will find ways to lend
that money till they again dig themselves a hole.

~~~
jurjenh
Well, with 859,000 sub-prime car loans already handed out, seems like they're
well on the way already.

Can anyone explain to me how handing out sub-prime loans to anyone is a "sign
of health returning to the economy?"

~~~
sethg
“Sub-prime credit rating” ≠ “guaranteed to default”.

If you look at the graph next to the article, the number of sub-prime auto
loans being issued is not up to the level it was during 2005–2009.
(Unfortunately the graph doesn’t go any farther to the left, so I can’t tell
if 2005–2009 was a bubble in the auto-loan market or just business as usual.)
And defaulting on a $20K car loan is not nearly as disastrous (for the
borrower or the lender) as defaulting on a $200K mortgage.

~~~
ck2
_defaulting on a $20K car loan is not nearly as disastrous_

Unless of course there are 100 times the number of housing defaults, because
the car is not worth the price it was bought at a month later after it's used.
Unlike land, cars _never_ increase in value, they only plummet.

I've never owned a car newer than 10 years old, I don't know why people have
to drive brand new cars, they certainly don't get better gas milage (and
apparently many people are using the credit to buy SUVs anyway).

~~~
sethg
Among the reasons why the sub-prime mortgage crisis has been Bad For America
are:

¶ People who live in depressed areas who are underwater on their mortgages
can’t move to someplace with better job prospects unless they abandon hope of
recovering the equity in their current house.

¶ In neighborhoods where a significant number of houses have been foreclosed
on (or where there is a lot of excess capacity because it was built up right
before the bubble burst), all property values suffer, even the value of houses
where the owners have good credit and have been making their payments.

¶ It’s a PITA for a bank to sell a foreclosed house, especially in a
neighborhood where there have been a lot of other foreclosures (see above).

None of these factors apply to car loans.

------
asterix
The fact is, sub-prime market is where banks make most of their money, not the
prime market. These loans have ridiculous fees ($2000 in fee for $3000 car) in
addition to high interest rates to bypass state usury laws. Banks don't really
care, they get these fees and sell the loans to investors.

I am hoping to make some change in this market. I am working on a start up
that would help those with limited credit, like Gen Y, get car loans at better
than bank rates. More when I have a decent beta page ready, which should be
soon :-) But would be interested to learn if those just starting their careers
(18-24 yrs) are facing problem getting car loans at reasonable interest rates.

------
garply
I found this article interesting, but I think the submission title might be
guilty of "gratuitous editorial spin" as outlined in
<http://ycombinator.com/newsguidelines.html>.

------
mixmax
the big problem for the US is the American consumer. For the last 20 years the
average American has been using $1.10 for every dollar made. This has been
possible due to cheap loans and rising real estate prices.

The bare truth is that for the last many years America, and to some extent
Europe, has been living well beyond its means.

~~~
alecco
That's not necessarily bad. As long it's credit for durable goods not
experiencing bubbled up prices. There's good and bad leverage. Good leverage
is essential to develop a healthy economy.

~~~
RyanHolliday
The thing that's important here is the definition of "durable goods," I think.
It makes the discussion a lot simpler if we avoid the "doesn't wear out
quickly" definition and use the "yields utility over time."

The thing of it is, there really aren't many (if any) goods purchased by
consumers that are genuinely durable goods under that definition. Houses,
possibly, but we clearly know that can turn out badly. Everything else. . . .
well, everything else depreciates, most often quickly. Cars, televisions,
appliances, and so on.

There just isn't a return on investment in terms of dollars and cents for
consumer purchases that justifies the use of debt. If a business borrows
money, they're just leveraging to increase profits. If a consumer borrows
money, it's typically because they're not patient enough to wait until they
have the cash (been there, done that, know from personal experience).

Anyway, the point of everything I said is to say this: I don't think there's
good leverage for consumers, with the possible exception of student loans and
a mortgage (for a reasonable house!). Everything else is just impatience.

EDIT: Given my school loans I'm actually pretty skeptical of the utility of
student debt, too.

~~~
sokoloff
I don't entirely disagree, but I will observe that if you have have to borrow
money for a water heater, furnace, toilet, cooktop, refrigerator or similar
(because you lack one that works), that's almost certainly a wise thing to do.
Same with a car if you need a reliable car to get to (or perform [pizza
delivery]) your employment. I don't know that financiers would call that
leverage or not, but not all consumer borrowing is irresponsible or even EV-
negative. I wouldn't characterize the purchases of items like that on credit
as impatience.

~~~
dedward
Yes - credit for emergency situations - but even in those cases, it's only
correct if you are spending within your means. A cooktop/toilet/refrigerator
or similar are not that expensive - people should have at least several months
of cushion money in the bank after they've been in the workforce for a few
years... there should be no need to live paycheck to paycheck and borrow at
absurd rates on credit cards.

~~~
hnal943
I would strengthen your statement by saying that if you are borrowing, you are
by definition spending beyond your means regardless of the circumstance.

~~~
dedward
On contemplation, I agree completely.

I'm tempted to say there are edge cases, say your car broke down, you need
some repairs, it's within your budget, but you can't pay until your next
payday in 4 days, but you need it fixed today. That's what we've all been told
is the sort of ideal situation a credit card is good for - but then I realize,
that implies you are living check to check - which is already a bad position
to be in - the credit card might save you in that moment, but it won't fix the
overall financial problem you have.

(gonna ramble here) As soon as people start working, whether in highschool,
college, or after, they should start forming a cushion. That cushion should on
average grow throughout their entire working life. This isn't retirement
savings. It's not an investment. When it gets big enough, sure, you can cap it
and start investing, etc.. you don't need 10 years living expenses sitting in
the bank.... but what about 6 months? What about a year? That's not absurd to
me. Imagine the comfort of knowing you can lose your job, maybe be a bit more
frugal, maybe pause on contributing to your retirement fund and no big
vacation this year, but you have enough liquid cash in the bank that you don't
need to work for a year. That cash becomes something you treasure. You don't
WANT to dip into it. You won't just blow it on junk once it gets bigger. YOu
won't just take a year off for fun - you'll just take comfort in the fact that
you don't care when payday is and can think long term. You can make rational
decisions about your job, changes in life, etc. It keeps you far, far away
from the punishing cycle of debt the banking industry makes it so easy for you
to get caught up in. It gives you HUGE leverage in financial situations.

It's basically cash in the bank that you can call on at any time. Anyone who
has been working more than a few months should not be living paycheck to
paycheck - if we could just get that message across to more people, things
would be a lot better for all. People always say "oh, easy for you to say, I
have expenses, blah blah....". Those same people, if given a 50% raise, will
tend to increase their spending habits by 50% and still live paycheck to
paycheck.

We need to stop thinking like a credit society. The credit score needs to stop
being the most important financial market we measure by.

Even when it comes to housing - We need to stop talking about "buying a house"
when we mean "mortgaging a house".

Everyone always counters with "Well, how else am I supposed to afford a
house?". One answer might be "If you don't have enough to buy the house
outright, you CANT afford the house". Sure, there are reasonably low risk
situations responsible people can put themselves in and buy rather than rent,
and come out ahead - but how many people actually do that -vs- get into the
danger zone? I wonder.

Some cultures work for the benefit of future generations - they are a
generation ahead at all times. The parents buy the house and pay for school
for the kids when they grow up/get married/whatever, as their parents did for
them. The kids, grown up, finished school, work to save up money to buy their
kids an education and a house, and so on. What rule says we have to stay
behind, when we could be a generation ahead with a little planning?

TL;DR: Agreed

------
dreish
This is a vastly different issue from subprime home loans. The key difference
is that depreciation of cars is reasonably predictable; car prices are not
typically subject to speculative bubbles.

