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Subprime Car Loans: Blessing or Curse?

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On: Mon, Jan 26, 2015 at 8:58AM | By: Bill Wilson


Subprime Car Loans: Blessing or Curse?

For many people in today’s world, a car is a necessity. In most cases, though, purchasing a vehicle requires financing, which can be difficult for those with recent financial setbacks to obtain. Some estimates show that as many as 50 million Americans suffered significant damage to their credit ratings during the banking crisis of 2008-2010.

A new form of financing is enabling these people to purchase automobiles. However, these programs come with a catch: if the person fails to make a payment on time, then the finance company can shut the vehicle off remotely, without warning and at any spot on earth. Needless to say, this new approach to financing is stirring up quite a bit of controversy.

Mary Bolender, a resident of Las Vegas, experienced the downside of these programs for herself in September 2014. Her 10-year-old daughter was running a high fever and needed to go to the doctor. Ms. Bolender placed the child in her 2005 Chrysler van and tried to start the engine. But the vehicle refused to crank. Her finance company had disabled the engine because she was three days late on her monthly payment. “I felt absolutely helpless,” Ms. Bolender said later.

Her dilemma is typical of experiences reported by other consumers who have gone the same route to get auto financing. To serve this vast market, lenders have teamed up with car dealers to offer financing to these people. For many, these loans are their only means to obtain an automobile.

These loans come with several strings attached: interest rates often exceed 30%, repayment may take several years, and the buyer must agree to have an auto-shutoff device installed in their car.

For repo men, these devices are a dream come true. Gone are the days when they were forced to patrol neighborhoods all hours of the day and night looking for cars. Nowadays lenders can track vehicles using GPS technology and shut them down with the click of a mouse. For borrowers, there is no leeway; they must either make the payments on time or lose the ability to drive.

Loan companies are falling over each other trying to get a piece of the subprime financing business. In days where conventional loans pay paltry interest, the prospect of charging customers sky-high rates is too tempting to resist. One study shows that as many as 30% of vehicles financed in the last two years have a starter interrupt device installed.

This new way of financing cars is not without its critics. Customers who have had their vehicles shut off are often unable to get to work, take their children to school, or go to the doctor. Some have shared stories of their vehicles being disabled at red lights or in unsafe neighborhoods. Many consumer advocates are lobbying for new rules to regulate or outlaw the starter interrupt devices altogether.

For their part, lenders and dealers who participate in these programs say that they’re providing vehicles to people who could not otherwise obtain them. Many of those who sign up for these loans say that the devices serve as a “friendly reminder” to make their payments on time. For some, financing their vehicles in this manner has helped them learn to budget wisely and improve their credit rating.

Whether for good or ill, it appears that this unusual method of auto lending is here to stay. For those in desperate need of a vehicle, this stringent form of subprime financing may indeed be a blessing—as long as they can make their payments.

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