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.
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.
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.
Wow, this comes as great news for me. I felt terrible for years because I was paying 600/mo for a (special) car, that I paid off in exactly 5 years. I had a perfect storm of circumstances occur just as I was getting the loan, the banks no longer liked the risk, so it was financed by, like, the dealer's used car buddy a few cities over, and for a not-awesome rate. Long story short, all's well that ends well, still have the car, and I'm not as far off from the "average worst" as I thought.
I don't understand how people spend so much on cars when their net worth is under $5 million.
Do people not remember the economy can go in the toilet really fast? Why aren't people constantly scared and thus saving as much as possible and acquiring good assets? Even if the economy stays strong, your own career or profession can go bad or get disrupted real fast.
Personally I drive a fairly crappy car that I paid cash for, but I can see why people spend more on cars. Like cell phones they are luxury items that provide daily benefit to you. This is especially true if you're commuting long distances. For others a car is an extension of their personality. I'm not saying I agree with this mentality, but I understand it.
I don't think this is really about cars as much as it is about saving, and I can't speak for everyone, but I can speak for myself: my job pays crap. My last job paid crap. When my current workplace folds (which is likely to happen, and within a year) my next job will also be crap. It's not that the companies are poor, it's not that they're making little off my labor, they're making a packet, they just have a "take it or leave it" attitude towards pay. If they paid better - even just a reasonable rate - I would be saving as much as I possibly could.
As far as why people buy high end cars when they're not very rich, going into significant debt, I suspect it's because a car is a status symbol for so many people. If I could do without a car, I would. I'd be saving about $200 a month on my current expenses if I didn't need one - it's just a crappy old Mazda wagon, certainly no status symbol there.
For one, poor people don't usually have any money left over to save after covering most immediate expenses. The average person sucks at saving, but it's tougher to do with weak or volatile income.
The unfortunate reality is that (most) subprime borrowers don't have the luxury to consider catastrophic events that can occur in the future because they are too busy worried about today.
> 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.
Not sure I agree with that. My 72 month car loan, clearly not subprime, is 3%. I have better immediate uses for my money, I'm sure most folks can beat 3% returns over a 72 month horizon as long as your not paying 2 and 20.
The shop down the street advertises 72 months completely interest free. Assuming it's not a blatant lie, of course I would sign up for 72 months instead of 12, regardless of what I could afford. That's 60 months of me getting return on whatever investments I make.
All of the safety and fuel regulations have sent the prices of cars into the stratosphere.
Any kind of large car that you would want for a family is well north of $30. I paid as much more for a 1 year old minivan recently than I paid for a year old BMW 15 years ago.
No, safety and fuel regulations did not send prices of cars into the stratosphere. In the 1960's suburbs of Philadelphia, gas was 30 cents a gallon, a nice new car was $3k, the house cost $30k, and Dad made $10k as a VP of engineering at a small firm. Right now, all three are almost exactly 10x what they were then; so cars have not gone up more than regular inflation.
And, to top it off, today's car reliability is way, way higher, as is the quality (in the 60's, we were thrilled if a car lasted 6 years and got 80k miles; nowadays, that's about half of what you'd expect. And the safety is wildly improved (like, for instance, air bags, never mind seat belts!)
It's not just the additional mandated safety & economy features - buyers these days expect things like power windows and infotainment systems to be on the car. The only modern cars I know of with hand-crank windows are the sub-$15k cars like the Nissan Versa Note and the Ford Focus S.
I mean prices are going to be a little inflated over 15 years. Also you can get an incredible vehicle for $15 grand that is a few years old. Those safety requirements are something people (especially with families) are thankful for when they are put to use.
You can get a nice, large used family car or minivan for much less than $30K. More like $10-15K. You can find good examples for less if you are patient.
> 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.
Don't they just auction the place with no reserve? That's what I though happened to repossed houses. I could be wrong here.
Chances are someome will take out a new loan with one of the big banks to finance their new purchase. The bank gets to keep all the money already paid in by the original lender anyway.
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.
I'm guessing here, but considering how much value is lost just driving a car out of the show room, even a six month old repo'ed car is going to go for, what, maybe 50% it's original sale price at auction.
Whoever reposses the cars isn't interested in sitting on them for weeks to wait for the right buyer at the right price.
That's trade-in value. Auction value is lower. Additionally, being repo'd is a hefty detractor to the auction price; plenty of dealerships categorically don't buy repo cars. Plenty of customers, too.
Plus the repo fee coming out of the auction price...
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.
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%
> 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.
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
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.
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.
Franchise stores net 2-5% before taxes on "big" numbers. $20mm yearly rev for a smaller, rural, domestic franchise to multi-billions in yearly rev for a nationwide autogroup.
As mentioned, most profit is generated from service and finance.
Both of these cars you purchased are from high volume mfgs. The dealers made holdback money plus the sales count towards yearly tier incentives.
Electric vehicles in particular pose a challenge to the service-derived revenue stream due to lower maintenance costs, so much that Audi's US President urged their dealers to focus on selling value-added services like home EV charging station installations to make up for the lower service requirements of their upcoming EVs:
I started with Edmunds and True Car. This turned out to be a waste of time as in the deals I got through those sites were just okay.
I also did some research on gm-volt.com and mazdas247.com to see what other folks claimed to be getting in terms of pricing.
Eventually I contacted a bunch of dealers that I knew had the car I wanted (Mazda and GM's web sites will show you all the inventory in an area) via email and asked them what their best price was. The dealers near me which had the cars on their lot didn't offer me the best prices though.
In the end, I got the best prices (and the most pleasant sales experience) from two dealers each about an hour from home. They were happy to negotiate via email. Even though they didn't have the specific car I wanted, both claimed they could secure it from other dealers, which they did. Both of those dealers had the most aggressive price up front and I was able to get them each to come down a bit from there.
As far as I understand, for every sale dealers will get a "rebate" from the car company. This obscures even more the relationship between the MSRP and the dealer's cost. I think it also works as something of a tax dodge for the dealer by shifting profits late into the fiscal year.
not just holdback, some manufacturers offer hidden stair-step incentives that once hit, are retroactive to all vehicles sold that month. That's why you can usually get the best deal towards the end of the month, when the dealer is willing to sell below cost to get that hidden incentive, sometimes worth over $100,000 depending on volume.
This American Life made a whole episode in a dealership which had that exact problem: they had to sell 129 in a month to get a bonus from the manufacturer.
"The last day of the month continues and the truism is accurate: some people get great deals because it’s the end of the month and they have to hit their goal. When you look at the numbers, the average car they sell in the last two days actually loses money."
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).
Its interesting to note that GM Financial is a rather new addition to GM. They sold their original vehicle financing arm (GMAC) during their bankruptcy as did Fiat Chrysler.
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.
> 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.
There's definitely a wholesale and a retail "book" for used vehicles. The dealer will buy cars at auction at wholesale (or take them in trade, proabably for less than wholesale) and try to sell them at retail.
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.
I used to deal in < 10k€ used cars. That's where there is the most flow. Note that Europeans have much smaller and cheaper cars than Americans.
There never was room for a $5000 margin. The rare multi-k hit became rarer and rarer with the advance of the internet, until it completely disappeared.
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!
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.
Sorry, but that makes no sense. The used-car dealerships giving people crappy high-interest loans are not affiliated (nor are their lenders affiliated) with the new-car dealerships giving people 0% loans. What incentive is there to give someone a 0% loan at all? There's no profit in it. The only way it makes any sense for the lender is if 1) they hope you'll forget to make a payment and then they can charge you fees, or 2) they're affiliated with the manufacturer, and being used to promote sales.
Only people with good credit are getting 0 percent. A new car dealer will happily find crappy high-interest financing for poor credit buyers. The finance guy has contacts with a dozen or more lenders.
0 percent brings in good credit buyers who might otherwise buy a different car, or who might just keep driving their old cars.
>A new car dealer will happily find crappy high-interest financing for poor credit buyers.
They will, but not necessarily with the same lender. Lender A giving out 0% loans is not getting money from lender B giving out 15% loans.
>The finance guy has contacts with a dozen or more lenders.
Exactly. So what's the incentive for bank A to lend at 0%? They're not going to see any of the profit that other lenders get. In fact, they're not going to get any profit at all, unless the buyer defaults early or misses payments. It seems to me that the whole 0% loan thing is a way for dealers and mfgrs to keep their inventory moving, and perhaps make money just on the regular mark-up of the car itself (which isn't much with new cars these days), and hope the buyer comes back for overpriced service.
My wife bought a car from Carmax she has good credit they offered her a loan at 10%. She want through Farmers Insurance for a car loan at about 5%. At least in the case of Carmax they are doing high rate loans hoping people don't shop around for the loan.
Eh. Subprime rates, maybe. But I've got two car loans, one under 2%, one under 1%. I feel like I should pay them off early on principle (as opposed to principal), but it would be foolish to divert investment funds to paying them off early.
Assuming you can stomach the risk, if you can get a car loan for 1% and a market return of >1%, then you would be better off taking the loan, investing your money, and paying off the loan later.
With a good enough credit rating, and in tough enough times, you can get 0% loans, no payments for 12 months. Sometimes, the need to dump inventory outweighs the need to make money on loans.
(Of course, if you miss a payment, that 0% rate will jump to 12%.)
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.
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.
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.
This was very much part of it; they were even incentivized to inflate ratings. I really liked the explanation in Nate Silver's Signal and the Noise; another big piece was that risk pools were not as independent as the people/institutions/models assumed.
Yes, there was. But that's a problem that can arise in any market. It's ultimately the buyer's job to do their DD. These car loan securities aren't being sold to retail investors - they're being bought and sold by pension firms and hedge funds. Sophisticated people that can and should do their own DD. Whether or not they do it is on them. There's no need for the government to step in here, because the only consequences are to the investors themselves, not the general public.
The global financial crisis was a unique case, due to how widespread and enormous the size of the problem was. If these mortgage backed securities hadn't been so huge, it would have been a non-story about how some investors lost money by making a bad bet (i.e. what happens every single day on wall street).
Part of being able to do DD is expecting integrity from auditors, and ratings agencies. One of the big problems of 2008 was that the rating agencies were, essentially, conducting fraud on a massive scale.
Perhaps it is a bit naive of me to expect either from a financial firm... But it really is in their best interests to maintain some semblance of law and order in their dealings.
After all, if things get bad enough, there will not be a shortage of hemp and lampposts.
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.
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.
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.
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.
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.
Finsight Subprime Auto issuance profile: https://finsight.com/sector/Auto/Subprime%20Loan