Got A Pulse? Buy A Car: Sub Prime Riding High Again
Easy credit is coming back: U.S. lenders extended to car buyers some of the easiest credit terms since the financial crisis in the first quarter, credit research company Experian told Reuters.
People with subprime credit scores receive loans again, interest rates are down and there is more time to repay.
Says Reuters:
“The relaxed terms make it easier for individuals to buy cars, which is good for car dealers, manufacturers and the economy. But more aggressive lending also increases the chances of another round of losses for banks if borrowers lose their jobs and cannot keep up their car payments.”
Bertel Schmitt comes back to journalism after taking a 35 year break in advertising and marketing. He ran and owned advertising agencies in Duesseldorf, Germany, and New York City. Volkswagen A.G. was Bertel's most important corporate account. Schmitt's advertising and marketing career touched many corners of the industry with a special focus on automotive products and services. Since 2004, he lives in Japan and China with his wife <a href="http://www.tomokoandbertel.com"> Tomoko </a>. Bertel Schmitt is a founding board member of the <a href="http://www.offshoresuperseries.com"> Offshore Super Series </a>, an American offshore powerboat racing organization. He is co-owner of the racing team Typhoon.
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Subprime never left TFS has been writing paper to 520 for almost two years now. Scion dealers publish the TFS rate sheet and update them daily on their websites: http://www.avondalescion.com/Finance-Rates.aspx Kind of eye opening. Toyota will gladly give you 100% financing at 20.70% for 60 months on the new Scion of your dreams with a FICO score of 520. Never mind the criminality of 20.70% interest. On the other hand if your FICO score is 720 and above, 3.25% for 60 months at 130% financing awaits. Wait 130%??? Why yes, now you can roll the sales tax and some TRD accessories into that purchase, or the balance on your upside down loan on your trade-in. If Toyota is doing this - I'm sure everyone is following. At least they are no longer writing paper for FICO scores below 520 (last month TFS was)
20.7% interest is not criminal if you have a 520 credit score; if you have a score that low you have stiffed a bunch of creditors. You have to make an effort to have a score that low. If your score is 720 or over you basically pay everybody on time, all the time. Not surprisingly the consequences of the two behaviors yield very different results. The 520 score tells creditors that they have a pretty good chance of getting many payments late or not at all, and they are going to have to make lots of collection calls and perhaps repo the car; all those efforts plus the implied risk cost money. I would not lend money to somebody with that kind of score under any circumstances; if a lender is willing to do so the interest rate understandably reflects the high risk. If pay your bills on time and in full you get to pay very low interest rates when you borrow money. Pay your bills late or not at all and you will find very few people want to do business with you at all, and those who do will make it expensive or even dangerous.
The Reuters article could be more accurate. The resulting losses will be transferred to ATM users and if that fails, the US taxpayer. We've all learned that banks don't lose money. Profits are privatized and losses are socialized. Good business plan if you can get it!
I don't think there were many losses on car paper during the 2008 affair. And, given that used prices are very high, there won't be many losses on the latest version. GMAC did go down, but they did the old fashioned way with house mortgages.