By on December 6, 2007

0.jpgWe called it: Detroit's reliance on"zero percent for anyone with a pulse" financing to move moribund metal is coming back to haunt them. The Wall Street Journal (WSJ) cites a study by Lehman Brothers that reports that 4.5 percent of '06 auto loans were at least 30 days delinquent as of the end of September. That up from October's 2.9 percent, and represents the biggest one-month jump in at least eight years. And here's the really worrying bit: that's the stat for "top-rated borrowers." At the lower end of the food chain, 12 percent of subprime borrowers were delinquent on their 2006 auto loans as of September. That's up from 11.1 percent the previous month; it's the highest level since 2002. Seen from another perspective, "In the second quarter, borrowers were at least 30 days behind on 2.77% of all auto loans made by nonbank lenders, the main players in the market, according to the American Bankers Association. That was the highest delinquency rate since 1991." Although the WSJ has some soothing words for nervous auto execs, we reckon this one's gonna blow-up good. Tightened credit will remove one of Detroit's most effective sales devices (low-cost loans) and a flood of repo'ed cars– which are usually heavily abused– will further destroy residuals. Lest we forget, Mitsubishi barely made it back from the brink when its low-rate loans to credit-challenged buyers came back to bite them in the ass. Those who do not learn from history…

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25 Comments on “Big 2.8’s “Anyone with a Pulse” Loans Headed for BIG Trouble...”


  • avatar
    KatiePuckrik

    I don’t know how much of this is truth and how much is conjecture, but to be fair, Mitsubishi have very rich parents (The Mitsubishi family) and I’m sure they helped Mitsubishi Motors out of their financial quagmire whilst they got on with the business of making (rather good) cars. One member of the Mitsubishi family is a huge bank. No doubt a lot of help came from there.

    Detroit are in trouble, no matter which way one looks at it. Their cars can’t have been that good because they had to use zero percent financing to shift them and all the deadbeats, who took them up on their offers, no doubt defaulted, which means the cars will get repossessed and sold for cheaps on the used car market. This means resale value of new Detroit cars will trend downwards which means, less people will buy Detroit steel because of their poor resale value and less customers mean……oh my! It’s not looking good, is it…….?

  • avatar
    indi500fan

    A college age friend of my daughters recently resigned after a year of being a high line “pre-owned” retail salesman. He said all he did was grub around for credit for the buyers. Everybody wanted a car, almost nobody could really afford one. He said it was not a very fulfilling career.

  • avatar
    jthorner

    A lot of those buyers should have been reading “In Praise of the $500 Car” on TTAC rather than getting into new car loans.

  • avatar
    N85523

    Ah, unforeseen consequences…

  • avatar
    jthorner

    “Ah, unforeseen consequences…”

    They are only unforeseen if the people making the business decisions willfully didn’t want to see!

    All anyone had to do was to look at the Mitsubishi US experiment with anybody-can-have-a-loan to see how this would turn out come the next economic downturn. Downturns always come around for one reason or another.

    I wonder how many Escalades with $1000/month payments are suddenly going to be back on the used vehicle market?

  • avatar
    geeber

    jthorner: A lot of those buyers should have been reading “In Praise of the $500 Car” on TTAC rather than getting into new car loans.

    The problem is that most of these buyers wouldn’t consider a $500 car…which is why they are in trouble in the first place.

    Many of the people who drive very cheap cars actually have a fair amount of money saved. They live below their means.

  • avatar
    Gardiner Westbound

    The Bush administration is set to announce a plan to help strapped homeowners deal with their excessive payments. Perhaps it will work out something similar for automakers and overextended car buyers.

    If enough stupid people do really stupid things, like giving unaffordable mortgages or omitting investment due diligence, the government will always bail them out at the expense of people who didn’t do really stupid things.

  • avatar
    Virtual Insanity

    Geeber:

    Very true. You don’t become rich by spending everything you make. Before I settled on my Speed3, I was pretty much dead set on a G35 coupe. I could have easily afforded it, but I then realized that I wouldn’t have much entertainment money left over after each month. So I went with my third choice, the Speed3. If your wondering, no, the G35 wasn’t my first choice, a ’98 Supra Turbo was. But as much as I lust for one, even I can’t justify spending what they want for ’em.

    Though I do wish that Mazda was offering “at least have brain activity, even if we have to force you to breath” financing. 0% APR when I could easily afford it at the current APR (which is far from zero, lol) would have made life magnificent.

  • avatar
    mikey

    I read all these stories and hear them on the daily news.I wonder who is the dumber, the guy who lent the money,or the idiot that borrowed it?
    Maybe I’m an old guy,but I believe that if you ain’t got the dough,you ain’t got the dough period.
    A couple of weeks ago I sat in a ZO6 rag top.Salesman says you work at GM? Yeah I do.Guy says let me make some calls I’ll have you driving that baby in a couple of days.
    Dude I says,this car is outa my league.We can finance anybody just sign here.
    All that guy wanted was a sale and a commision.
    I guess thats why I don’t own the Vette.

  • avatar
    Landcrusher

    I just want to take this opportunity to compliment you all on exceedingly good posts!

    There ain’t nothing left to say. I love you guys (slang translation – that includes you Katie).

  • avatar
    Raskolnikov

    “I wonder how many Escalades with $1000/month payments are suddenly going to be back on the used vehicle market?”

    Or Tundras with $800/month payments?

    Don’t forget…automakers besides Mitsubishi and the 2.8 ofeer 0% too.

  • avatar
    M1EK

    The $500 car is often a BAD decision for people living at the margins. For instance, the $500 car I finally got rid of had cost $1500 in maintenance the previous year – and add to that the cost of the unreliability. If I had gone the other direction and just bought a ‘new’ $500 car each time it croaked, I’d have spent more money and had even less reliable, even older, cars for the trouble.

    We did sell the car for about $1200 after dumping a new engine computer in it (I didn’t even know bare-bones ’89 Civic hatches HAD a computer – they did, and they are expensive to get these days) but I still think that was a case of finding a bigger sucker (big enough, anyways).

  • avatar
    AKM

    jthorner: A lot of those buyers should have been reading “In Praise of the $500 Car” on TTAC rather than getting into new car loans.

    The problem is that most of these buyers wouldn’t consider a $500 car…which is why they are in trouble in the first place.

    Many of the people who drive very cheap cars actually have a fair amount of money saved. They live below their means.

    Oh so true…
    If only more people were thinking this way, we wouldn’t be in a heap of trouble we are today.
    But I still see so many people driving cars way above their price range…

  • avatar
    compy386

    TTAC you have some facts wrong about this issue:

    1. Zero percent financing as referenced in your previous article is better for the domestics for default reasons. Zero percent loans have extremely low default rates because the customer’s payments all go to principal. Plus truthfully the customer is just prepaying their interest (i.e. if they didn’t take the zero percent, they would have gotten a cash rebate up front).

    2. If you read the article their using very specific past due requirements. First they’re only counting new loans and only for specific sets of customers. Second they’re using a 30 day criteria which is not what’s used by most banks. The requirements for delinquency for banks is 90 days. I work for Ford and looking at the numbers Ford Credit’s past due is 60 days (a stricter critera then what’s used by banks) is less than 1% for all retail loans.

    Auto loans are not as risky as mortgage loans because the majority of the payment is going to the principal. The reason mortgages got into trouble was the customers purchasing homes at inflated prices. With the Big 3 discounting their vehicles like no other, I doubt these vehicles were purchased with huge premiums. It’s likely that the manufacturer makes out even in cases of default.

  • avatar
    Virtual Insanity

    Brief question to mikey.

    You work for GM right? Then where would one go about finding a droptop Z06? Because last time I checked, which would be today for a dealership still trying to get their SDC Zed in…they don’t. Unless it was a hack job, or one of the ones where the roof flew off.

  • avatar
    NN

    Question:

    I was looking at the 0% loans recently and at the bottom, in fine print, it always says something along the lines of “0% loans–$16.97 per every $1000 financed per month”, or something along the lines of that. What the hell does that mean? Anyone got a clue?

  • avatar
    compy386

    NN: That’s just how you calculate the payments. For 0 percent it’s easy. Just take 1000/(number of payments). For example a 60 month 0 percent loan costs 1000/60 = $16.67 per month per $1000 financed. You finance a $20,000 vehicle and that’ll set you back $333.33 per month.

  • avatar
    gmbuoy

    The mitsuibishi debacle was the result of a make no payments for one year lease play with decidedly high residual values baked in.

    The situation with the domestic’s captive finance is decidedly different then that particular mess.

    As the offshore manufacturers also have captive finance arms with reporting rules written in Japan and the E.U. it may never be public what the true state actually is.

  • avatar
    quasimondo

    A lot of people reference the fiasco that Mitsubishi found themselves in with their 0% financing. What’s lost in the comparison is that Mitsubishi went two steps further by letting you drive off with nothing down and no payments for a full year. In effect, drivers got a free car. The majority of reposessions that Mitsubishi dealt with were not from people living beyond their financial means, they were simply deadbeats who left Mitsubishi holding the bag at the end of the grace period.

  • avatar
    Kevin

    Well, as Ron Paul might say, this is the problem with feeeyat money. We should go back to bartering livestock and daughters.

    If you don’t have enough goats to buy a Malibu, then you don’t have enough goats. It’s not like you can pretend to have enough goats when any fool can look at them crapping in the pasture and count them and see that you just don’t have enough goats.

  • avatar
    glenn126

    Well, Kevin, I think you’re misunderstanding what Ron Paul was probably trying to get across. If he is saying we need to back our fiat money (“promises, promises – lies”) with gold, then what would make you think that you could not get a loan on backed money?

    In fact throughout much of history, most nations backed their currencies with gold, silver or both. And they had banks “way back then” as well as loans.

    What we also need to fix, other than fakey-do lies printed on paper, is this business of feeling that everyone is entitled to a cheap loan even if they probably can’t pay it back. In other words, the bankers actually need to grow spines to say no when it’s appropriate, and grow a set of morals and scruples which comes before growing a spine in this case.

    As little as 20 or 30 years ago, borrowing money was not just a matter of saying “yeah, I want…” because there were actually little matters like minimum required down payments (i.e. people had to take responsibility for their own decisions and lives and actually save up maybe 20% of the price of what they wanted to buy before they could get a loan on 80% – this proved they were earnest in their desire to own it, and that they had a means of supporting the payments and intent on repaying them).

  • avatar
    mikey

    Vitual Insanity:My mistake I know it was a rag.But a calL to the dealer ponted out it was a Z51.

  • avatar
    Landcrusher

    M1EK,

    You are absolutely correct. A person living on the margins would be better off buying a new car that costs nothing down and $167.00 per month for no longer than the term of the loan/lease. Assuming you can find that deal.

    Otherwise, you were better off with the car that cost you $2,000 per year. Apparently, it cost you less because you sold it for 1200? Anyway. People who are in this class of vehicle are likely not making a lot of money. Therefore, their time is not worth a lot of money. So the inconvenience of a break down doesn’t cost a lot for them. Also, the lack of a payment means that they can forego all expenses on the car by parking it if they need to. Try that with a loan.

    OTOH, if someone is a recent college graduate who is working in an entry level job where they know for sure that their income is going to go way up, they may be better off spending a little more for a new

  • avatar
    dean

    Glenn, it is the bankers who have pushed the easy credit, not the other way around. Even with higher default rates they still make a boatload of money on all the interest charges.

    And the lenders sure don’t care if easy credit enables people to lose everything.

  • avatar

    compy386 :

    Sorry for the delay responding. I needed to dig a little deeper and had to step away for a bit. At the risk of telling you something you already know…

    First, it wasn’t the interest rate that was questioned. Zero percent loans have comparable default rates (if given to a certain credit quality borrower). A payment is a payment to the borrower whether it’s 100% interest or 100% principal.

    The default rates on loans has more to do with credit quality with those in lower tier credit generally having higher default rates – hence they pay higher interest.

    GMAC has launched programs in the past to extend financing to lower tier borrowers who traditionally wouldn’t qualify for new car financing. Any losses in such loans – beyond actuarial assumptions of what could be expected – were picked up by GM as a cost and not GMAC.

    Anyway, default is a technical term.

    What Wall Street is concerned about is this: more and more people, even in better credit tiers, are behind on their loans– even if it is 30 days. While maybe not in default, they’re falling behind. And that ain’t good.

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