Here's how those numbers work out in real life for a 60-month loan amount of $16,333, using the average interest rate received by each group of borrowers with scores below 660.Remember, the finance companies, especially the big ones, are getting their funds to loan out at 19% for essentially 0% interest. Didn't they used to call this usury?
- Nonprime: 9.29 percent for 60 months = $341 per month
- Subprime: 15.72 percent = $394 per month
- Deep subprime: 19 percent = $423 per month
Aside from that, I see a couple of big problems here. First, did you notice they referred to a 60 month loan? Five years on a used car? The lenders are stretching out the loan periods beyond that, up to 6 and 7 years. Given those 19 or 20 % interest rates, these car “buyers” won’t own any equity – zero – in the cars until after month 60. I've said before I don't understand why house mortgages were never supposed to be underwater when car loans routinely are; this is an example. For five or more years, the buyers have no economic interest in the vehicle they “own.”
The second problem here is that it's not just a small percentage of the buyers that need Subprime and Deep subprime loans at these high rates. Consider General Motors. Roughly 90% of GM car buyers finance their purchases, no surprise there, but as recently as 2014, 83% of their loan book was subprime, with a shocking amount categorized as “deep subprime.” That means only 17% of buyers have good enough credit to get to "nonprime" and it's not possible to figure what percentages get "prime" or "superprime" rates. Bonner & Partners continue their analysis with:
By the end of last year, total auto loans outstanding in the U.S. had reached almost $900 billion – up nearly 25% in only two years. Does that sound wise? Loans that originated last year have begun to default at a pace not seen since the 2008 financial crisis.I want to make it clear that I'm not saying bad things about people who have to get those loans. Shit happens and bad shit happens to good people. The thing that gets me is the idea that 83% of the people who finance GM cars are in the bottom two (of five) rankings for loans. When that many people need to pay these outrageous rates to buy cars, I can't see how the system can survive.
This problem is going to get a lot worse. It will probably result in bankruptcy at Ford Motor and massive losses to financial institutions that own these auto loans, like GM Financial and Santander Consumer USA.
The crisis of 2008, which we aren't really over, was about too much debt on every level: homes, consumers, and businesses. Has anything really changed?