74% of car loans are subprime.

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SC Hoosier
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74% of car loans are subprime.

Post by SC Hoosier » Thu Mar 19, 2015 10:34 am

Just heard today that Americans owe $783 billion on their cars, 74% of which is in subprime loans. So, that means that at least 74% of those with a car payment should have bought a cheaper car.

Wow. This is sad people. Anyone agree?

Hoosier

PS. My source was a radio show, don't know where they got it.
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Re: 74% of car loans are subprime.

Post by Grt2bOutdoors » Thu Mar 19, 2015 10:40 am

The data is likely to be found at one of the Fed sites, the large banks who specialize in auto-financing - JPM, Wells are two of the larger auto lenders, Ally. I'm not surprised if it's true - people are in love with their vehicles, but if they don't pay - the repo man will take the car back quick, unlike homes which sit in foreclosure proceedings for months and months and months.
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Re: 74% of car loans are subprime.

Post by Twins Fan » Thu Mar 19, 2015 10:51 am

I didn't hear the radio show so I don't know, but it sounds like "subprime" was being discussed as if it meant underwater... or the loan balance being more than the car is worth.

Doesn't subprime have to do with the interest rate on the loan, as in it's higher than the prime rate if subprime?

I don't know that it says 74% should have bought a cheaper car (although, probably yes) because they would have likely got a subprime loan either way based on credit score. To me it says those with bad credit should avoid taking out loans if possible, and having a loan out on an item known to depreciate is a bad idea. But, then those with bad credit can improve that by having and paying off a loan, and most people need a car... sooo.... it's circular. :happy

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Re: 74% of car loans are subprime.

Post by SC Hoosier » Thu Mar 19, 2015 11:00 am

Twins Fan wrote:I didn't hear the radio show so I don't know, but it sounds like "subprime" was being discussed as if it meant underwater... or the loan balance being more than the car is worth.

Doesn't subprime have to do with the interest rate on the loan, as in it's higher than the prime rate if subprime?

I don't know that it says 74% should have bought a cheaper car (although, probably yes) because they would have likely got a subprime loan either way based on credit score. To me it says those with bad credit should avoid taking out loans if possible, and having a loan out on an item known to depreciate is a bad idea. But, then those with bad credit can improve that by having and paying off a loan, and most people need a car... sooo.... it's circular. :happy
Yes, the show meant that subprime means a higher interest rate. My point is that those with subprime car loans should have bought a cheaper car to reduce or eliminate the amount borrowed. It would save a LOT of money.
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Re: 74% of car loans are subprime.

Post by Rupert » Thu Mar 19, 2015 11:04 am

NPR had a story about car loans this morning. I only caught part of it, but the gist seemed to be that people are routinely taking out 7 and 8-year car notes. Bank/finance company representatives said (I'm paraphrasing all quotations in this comment), "This is great. Cars are more expensive because of all the new electronic gadgets, and these longer notes let people buy cars." Consumer advocates responded, "This is insane. Some of these car notes last longer than the average marriage in this country." Interestingly, Honda is the sole auto manufacturer/finance company that has refused to offer the new, longer loans.

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Re: 74% of car loans are subprime.

Post by SC Hoosier » Thu Mar 19, 2015 11:16 am

I also just heard on the radio that the average amount borrowed on a new car is up to $26,000. :shock: :oops:
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Re: 74% of car loans are subprime.

Post by MathWizard » Thu Mar 19, 2015 11:17 am

Here is a Bloomberg article from Nov 2013 on sub-prime loans for NEW cars.
The article cites only 27%, but again this is only NEW car sales.

I could see three driving factors on the buyer's side:
1) A reliable car is needed to get to most jobs unless you live in a
city with very good public transit. Many places, especially rural do not have this.
2) Used car prices are quite high now relative to new car prices. My last car purchase
about a year ago was the first time I could not buy a good used car a below book value.
This is probably partially due to the lowered US production in 2008-2009. US car production
in the two years 2008-2009 was about the same as the single year 2007.
3) The low teaser interest rates are good only on new cars with short term. (2.9% but you need to be buying
a new car, and the loan is only for 3 years.) This pushes buyers towards new cars.

Also how many people on this board take out a loan for a car?
I haven't had a car loan since grad school.
This takes out a large pool of people who could get prime loans because they just pay cash.

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Re: 74% of car loans are subprime.

Post by jfn111 » Thu Mar 19, 2015 11:20 am

Also how many people on this board take out a loan for a car?
You see car loans mentioned with quite a few posters listing their debts.
It seems a lot of Bogleheads don't mind a cheap loan from the car companies. :moneybag

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Re: 74% of car loans are subprime.

Post by Zecht » Thu Mar 19, 2015 11:22 am

Subprime tends to refer to a class of people in an algorithmic risk category. Typically, this means people with a high debt-to-income ratio that are not in very stable industries, or who have poor/low credit scores. This is further complicated by the dramatic rise in pricing of newer cars, and how expensive trucks and SUV/CUVs are currently.

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Re: 74% of car loans are subprime.

Post by SC Hoosier » Thu Mar 19, 2015 11:23 am

jfn111 wrote:
Also how many people on this board take out a loan for a car?
You see car loans mentioned with quite a few posters listing their debts.
It seems a lot of Bogleheads don't mind a cheap loan from the car companies. :moneybag
I would agree. It seems to me that it's pretty common here.
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Re: 74% of car loans are subprime.

Post by SC Hoosier » Thu Mar 19, 2015 11:25 am

Zecht wrote:Subprime tends to refer to a class of people in an algorithmic risk category. Typically, this means people with a high debt-to-income ratio that are not in very stable industries, or who have poor/low credit scores. This is further complicated by the dramatic rise in pricing of newer cars, and how expensive trucks and SUV/CUVs are currently.
You cited the reasons that subprime loans have higher interest rates. Thank you.
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Re: 74% of car loans are subprime.

Post by letsgobobby » Thu Mar 19, 2015 11:38 am

NPR reported this morning that 1/3 of all car loans are for 72 months or longer. I didn't catch if it was all, new, or used cars that they spoke of.

I wonder if some has to do with our aging vehicle fleet. The average age was up to 9 years in 2013, 2 years longer than the 7 years which had been stable for 2 decades:

http://cen.acs.org/articles/92/web/2014 ... rtier.html

Cars are higher quality than ever, but still: they start to wear out, repairs start to mount, and people get the new car itch. In other words there may be considerable pent up demand for newer vehicles, price/loan length/borrower quality be damned.

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Re: 74% of car loans are subprime.

Post by inbox788 » Thu Mar 19, 2015 11:54 am

I'm surprised it's that high and find it a little hard to believe. Maybe it's just a particular segment of the market.

Folks with poor credit who need transportation are stuck with double digit interest rates on used cars and dealers who repo upon first missed payment. Sometimes payments are demanded in cash in person. I can see this used car group as largely subprime.

It used to be that you needed better credit to get longer loans like 48 or 60 months, but these days 72 or 84 month loans may be going to those with lesser credit, while the better credit folks can get better deals with leases and similar payments.

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Re: 74% of car loans are subprime.

Post by anil686 » Thu Mar 19, 2015 11:58 am

Without listening to the segment it is hard to say. I listened to a Diane Rehm segment on this issue about a month ago. It seems that a lot is in the definitions as it is very different than subprime mortgages. Also, the impression I got from the NPR episode I listened to was that it was an increase by 74% - not 74%. However, the total number of subprime auto loans were fairly low and not that inconsistent with the pre-2007 period (like 1970-2007 period) - but that was just my understanding...

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Re: 74% of car loans are subprime.

Post by Andyrunner » Thu Mar 19, 2015 12:04 pm

I worked one summer at a credit union filing loan applications (boring internship job). Based on all of the loan application data I saw, I guess I wouldnt be surpised. Part of it is the uneducated people the other part was the super shady salesmen.

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Re: 74% of car loans are subprime.

Post by livesoft » Thu Mar 19, 2015 12:07 pm

My car loan is subprime as well. That is because my interest rate is below (i.e. sub) the prime rate. Be careful when journalists talk about subprime. Do they mean the interest rate or the credit rating? Do not assume they are talking about what you assume they are talking about.
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Re: 74% of car loans are subprime.

Post by baw703916 » Thu Mar 19, 2015 12:09 pm

How is this actionable (other than not taking out a high interest rate car loan yourself)?

There will always be lots of people doing financially stupid things.

Ignore them.
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Re: 74% of car loans are subprime.

Post by dm200 » Thu Mar 19, 2015 12:49 pm

inbox788 wrote:I'm surprised it's that high and find it a little hard to believe. Maybe it's just a particular segment of the market.

Folks with poor credit who need transportation are stuck with double digit interest rates on used cars and dealers who repo upon first missed payment. Sometimes payments are demanded in cash in person. I can see this used car group as largely subprime.

It used to be that you needed better credit to get longer loans like 48 or 60 months, but these days 72 or 84 month loans may be going to those with lesser credit, while the better credit folks can get better deals with leases and similar payments.
I have some involvement with consumer lending. I find this headline of "74% subprime" a bit puzzling as well. I do know that auto lending/financing has grown a lot recently and that, to a degree at least, folks with not the best credit are more able to get auto financing. Maybe (not sure) the definition (or understanding) of "subprime" has changed so that more folks are included. I also know that the less "credit worthy" a person is, the higher interest rate they will be charged. Some "alarmists" may use such "headlines" to demonstrate (wrongly I believe) that auto lenders are taking too big of a risk on these "subprime" car loans.

I also wonder (don't know) if there is a significant difference between the number of loans and the dollar amount of loans that are "subprime". If these "subprime" loans are smaller dollar amounts - the dollar percentage may be less.

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Re: 74% of car loans are subprime.

Post by HomerJ » Thu Mar 19, 2015 12:55 pm

baw703916 wrote:How is this actionable (other than not taking out a high interest rate car loan yourself)?

There will always be lots of people doing financially stupid things.

Ignore them.
Ignore them until they take down the entire economy? One could ignore all the dumb people who bought more house they could afford 6 years ago, but ignoring them didn't keep them from impacting us.

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Re: 74% of car loans are subprime.

Post by Bendoza » Thu Mar 19, 2015 1:25 pm

Are we sure about this number? I'm seeing this from last month:

http://www.usatoday.com/story/money/car ... /23670663/
Sub-prime and deep sub-prime borrowers -- those with credit ratings of 501-600 and 500 and lower respectively -- accounted for 20.3% of all borrowers in the fourth quarters, a slight decline from 20.6% a year earlier.

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Re: 74% of car loans are subprime.

Post by tludwig23 » Thu Mar 19, 2015 3:06 pm

SC Hoosier wrote:Just heard today that Americans owe $783 billion on their cars, 74% of which is in subprime loans. So, that means that at least 74% of those with a car payment should have bought a cheaper car...

PS. My source was a radio show, don't know where they got it.
Maybe you shouldn't believe everything you hear. I could find no support for those numbers or anything close.
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Re: 74% of car loans are subprime.

Post by tludwig23 » Thu Mar 19, 2015 3:08 pm

HomerJ wrote: Ignore them until they take down the entire economy? One could ignore all the dumb people who bought more house they could afford 6 years ago, but ignoring them didn't keep them from impacting us.
Interesting that you put the blame on the people taking out the loans and not on the people giving out the loans.
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Re: 74% of car loans are subprime.

Post by Dandy » Thu Mar 19, 2015 3:24 pm

Subprime car loans, payday loans, credit card debt carried over month to month - big source of bank income. Keeping poorer people in debt pays off.

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Re: 74% of car loans are subprime.

Post by swaption » Thu Mar 19, 2015 3:34 pm

SC Hoosier wrote:Just heard today that Americans owe $783 billion on their cars, 74% of which is in subprime loans. So, that means that at least 74% of those with a car payment should have bought a cheaper car.

Wow. This is sad people. Anyone agree?

Hoosier

PS. My source was a radio show, don't know where they got it.
That's just wrong. i know this topic and I know it well. Auto lending is more full spectrum than housing, or at least it should be. Reason is that in our economy, people generally need a car, and renting isn't really an efficient alternative to owning. But if you look at the big auto company captive finance companies, the sub-prime portion is generally well below 10%. The largest sub-prime lenders are Santander, General Motors (through acquisition), Wells Fargo, Chase, Ally, Capital One, and then numerous other smaller specialty finance companies. Keep in mind that some of these lenders also have very large prime portfolios as well. Add it all up, and this number isn't even close to reality.

But ignore this if you wish. Not nearly as much fun as the feeding frenzy of shock and awe at the misguided ways of our society.

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Re: 74% of car loans are subprime.

Post by sesq » Thu Mar 19, 2015 4:04 pm

I heard Ramsey the other day lamenting that something like 82% of cars are financed, and 1/3 of those are subprime.

If the number was 74% Ramsey would have been all over it. Still 20%+ of cars being purchase at subprime rates is alarming.

Full disclosure - I once bought with a subprime note. My credit got messed up (essentially a cosigned loan, to be young and stupid) and I financed a car for a couple months at a whopping 16%. I knew that a windfall was coming when I bought the car, but I couldn't wait due to a repair situation.

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Re: 74% of car loans are subprime.

Post by The Wizard » Thu Mar 19, 2015 4:08 pm

baw703916 wrote:How is this actionable (other than not taking out a high interest rate car loan yourself)?

There will always be lots of people doing financially stupid things.

Ignore them.
I agree.
I don't think this news impacts too many regulars on the forum here.
The smart thing to do is to pay a good percentage of the vehicle cost in cash and finance the rest from a non dealer affiliate at 1.5% or less.
People who pay excessive loan rates help keep the economy booming, I guess...
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Re: 74% of car loans are subprime.

Post by anil686 » Thu Mar 19, 2015 4:09 pm

swaption wrote:
SC Hoosier wrote:Just heard today that Americans owe $783 billion on their cars, 74% of which is in subprime loans. So, that means that at least 74% of those with a car payment should have bought a cheaper car.

Wow. This is sad people. Anyone agree?

Hoosier

PS. My source was a radio show, don't know where they got it.
That's just wrong. i know this topic and I know it well. Auto lending is more full spectrum than housing, or at least it should be. Reason is that in our economy, people generally need a car, and renting isn't really an efficient alternative to owning. But if you look at the big auto company captive finance companies, the sub-prime portion is generally well below 10%. The largest sub-prime lenders are Santander, General Motors (through acquisition), Wells Fargo, Chase, Ally, Capital One, and then numerous other smaller specialty finance companies. Keep in mind that some of these lenders also have very large prime portfolios as well. Add it all up, and this number isn't even close to reality.

But ignore this if you wish. Not nearly as much fun as the feeding frenzy of shock and awe at the misguided ways of our society.
Thank you for this - much of this was referenced in an excellent one hour discussion on the topic a few weeks ago on NPR. I think the reason this has become "news" worthy is that percentage has crept up from 3-4% in 2009 to about 7% now. In addition, one of the criticisms of looking at the success or longevity of subprime auto loans is that the average vehicle is repossessed about 45 days after being late with a payment. One of the major issues brought up in the radio piece was the ease in which borrowers who are late on a payment may have their vehicle repossessed quickly. This leads to high interest rates often to buy used cars and then the car being repossessed leaving the borrowers with nothing.

This is stark contrast to the housing market where the whole foreclosure process can take over 12 months to finish making accounting for at-risk mortgages easier to spot - JMO though...

http://thedianerehmshow.org/shows/2015- ... auto_loans
Last edited by anil686 on Thu Mar 19, 2015 4:49 pm, edited 1 time in total.

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Re: 74% of car loans are subprime.

Post by Hypersion » Thu Mar 19, 2015 4:29 pm

As long as the bank can't repackage these subprime loans and rate them as low risk or resell them to government agencies I don't see what the problem will be.

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Re: 74% of car loans are subprime.

Post by The Wizard » Thu Mar 19, 2015 4:48 pm

Good NYTimes article on this situation.
http://mobile.nytimes.com/blogs/dealboo ... s-to-poor/
Sounds like a good way to make $$ legally, if one has the right smarts...
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Re: 74% of car loans are subprime.

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