Big 2.8's "Anyone With a Pulse" Loans Headed for BIG Trouble

Robert Farago
by Robert Farago
big 2 8s anyone with a pulse loans headed for big trouble

We 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…

Comments
Join the conversation
4 of 25 comments
  • Mikey Mikey on Dec 06, 2007

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

  • Landcrusher Landcrusher on Dec 06, 2007

    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

  • Dean Dean on Dec 06, 2007

    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.

  • Robert Farago Robert Farago on Dec 06, 2007

    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.

Next