The Truth About Car Loan Debt and How to Break Free

Posted by Benjamin Platt, Contributing Writer on Jan 8, 2019 10:30:37 AM
Benjamin Platt, Contributing Writer
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Owning a car is as much a part of the American Dream as a house with a white picket fence, and taking out an auto loan is just part of the package. But having a car isn’t just about taking road trips; 86% of American workers rely a car to get to work. For millions of Americans living paycheck-to-paycheck, having daily access to a car is the only thing standing between them and financial disaster. Unfortunately, those are the same people being targeting by a growing trend of predatory subprime vehicle lending.

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Take a look at some recent car loan debt statistics:

  • A record 107 million Americans had auto loan debt in 2017.
  • Auto loan debt rose by $8 billion in the first quarter of 2018, reaching $1.22 trillion.
  • Nearly 1 in 5 new vehicle loans issued in Q1 2018 were subprime.
  • 6.3 million people were at least 90 days delinquent on their auto loans in Q4 2017.
  • Subprime auto loan giant Santander paid a $26 million settlement in 2017 for giving more than 2,000 Massachusetts residents “unfair and unaffordable auto loans.”
  • Wells Fargo had to pay $80 million in damages after making over 800,000 borrowers pay for unnecessary additional auto insurance between 2012-2016. Roughly 274,000 of those customers were forced into delinquency by the artificially inflated payments and almost 25,000 had their cars wrongfully repossessed.
  • Click here for more facts about auto loan debt.

 

The Subprime Auto Loan Crisis

Subprime car loans are not automatically a bad thing. In massive swaths of this country, a car is absolute necessary for getting to work, going to school, buying groceries and running errands. People with lower credit scores need to be able to buy cars as much as anyone else. The problem occurs when dealers and lenders take advantage of that need to push people into loans they can’t possibly afford.

Car loans are not nearly as regulated as mortgages or student loans. Interest rates on a subprime auto loan can easily top 25%. Subprime borrowers routinely end up taking on debt that is two to three times higher than the actual value of the car. And unlike homes, which can take years in foreclosure proceedings, once you miss 90 days of car payments, it’s relatively quick and easy for a lender to repossess your car.

Buy Here, Pay Here dealerships—auto dealers that do their own financing, and that target people with poor credit with ads proclaiming proclaim that they will approve anyone for a loan—frequently build a high rate of repossessions into their business model. The National Alliance of Buy Here, Pay Here Dealerships said their members repossessed nearly 1 in 3 cars they sold in 2015, and that most of the defaults occurred just 7 months into the loans. Selling a car, repossessing it, and then turning around and selling it again a few months later is just standard industry practice.

Last Week Tonight with John Oliver, which did an in-depth segment on predatory subprime auto loans, tracked one used car sold at a Buy Here Pay Here dealership for twice its Blue Book value and found that it had been repossessed and resold 8 times in 3 years.

 

 

Traditional dealerships and auto lenders can be just as bad. The treasurer of Credit Acceptance, a massive lender that was among the first to specialize in subprime car loans, freely admitted that they expect to repossess 35% of the cars they finance every year.

Santander reportedly urged customers to pay past due and repo fees to reclaim their repossessed cars, even when they clearly couldn’t afford to make their loan payments and would surely default again, according to former employee Jerry Robinson.

“I’ve seen people get repoed three or four times,” Robinson said. “There was pressure there, even when I was working in the reinstatement department, the key there was... how many customers we could get back in the car. That’s how we’d make our bonus.”

 

Discrimination in auto lending

In early 2018, the National Fair Housing Alliance sent undercover shoppers to a series of car dealerships in Virginia. Each time, they sent one white person and one person of color, and each time the person of color had better credit. More than 60% of the time, the white person was still offered a better rate on their loan. In those cases, the person of color would have ended up with a loan that would cost them an average of $2,662 more than their white counterpart for the same vehicle.

Discrimination in auto lending, as in mortgage lending, frequently makes it more expensive for people of color to own a car. This is just one more example of the systemic obstacles that make it hard for people in disadvantaged minority communities to get ahead.

A Harvard study has shown that commuting time is the most important factor in improving a person’s odds of escaping poverty. There are often few good-paying jobs in these underserved communities, so it’s highly likely that someone would need to drive to get to work, and drive further. But getting a car loan is a more expensive prospect, which means the chances of defaulting on the loan are higher. And if you default on the loan (losing the car, and likely the job), your credit takes a major hit, and the next loan will be even harder and even more expensive to get. It’s a cycle that can be incredibly difficult to break. 

In 2013, the Consumer Financial Protection Bureau issued a ruling that the Equal Credit Opportunity Act, which prohibits discriminatory lending practices, applied to the auto loan industry. Later that year, the CFPB forced Ally Bank to pay $98 million in damages and penalties for charging 235,000 minority borrowers higher interest rates for car loans, the largest auto loan discrimination settlement in history.

“Let's be clear,” Senator Elizabeth Warren said in April, 2018, in support of the CFPB ruling. “Discrimination in auto lending is alive and well.”

A month later, Congress reversed the ruling.

 

Eliminate your car debt

Subprime auto lenders don’t play nice with the terms of their loans or the tricks they use to squeeze every dollar out of you. DebtCleanse founder and CEO Jorge Newbery doesn’t think you should play nice with them, either. Click here to download a free chapter on vehicle loans from the DebtCleanse book. You’ll learn 25 concrete steps you can take to keep your car out of the hands of repo men (including detailed instructions on removing a GPS disabler device), get your creditor to the negotiating table, and settle your debt for a fraction of what you currently owe.

Here are just a few examples:

  • Mile Four: Cut the cheese. Cut the money flow and stop paying. If your payment is conveniently debited from your bank account each month, now is the time to cancel the auto debit and make collecting inconvenient.
  • Mile Six: Veto the repo. A frustrated repo man, seeing that your car is behind a locked gate or speculating that the car is in your locked garage, may come to your door to ask that you hand over the keys and the car. Veto the repo. Unless they have a court order, just politely ask them to leave. You would have been notified if they have a court order.
  • Mile Twelve: Are you threatening me? If you receive any threats, log as much detail as you can with regard to the communication, along with the date and time. If in person, take video using your cell phone. If they leave a voice mail, save it. These records may be helpful if this is ever litigated.

Check out the free chapter for more detail on these, and more than 20 other strategies to keep you in the driver’s seat.

These are drastic steps, and some can have a significant impact on your credit score. But if you’re up all night worrying about how you’ll put food on the table if your car gets repossessed, it might just be time to take extreme measures.

Looking for more assistance? When DebtCleanse launches in the coming weeks, free members will gain instant access to our debt tracker. Upgrading to a premium membership will unlock our powerful Action Tools, including 134 of the most common creditor deficiencies that you can use to fight back against unfair debt.

Premium members will also be able to connect with our network of attorneys who have been specially trained in DebtCleanse’s methods. Some of our tactics are unconventional, and none of them are simply asking your creditors for better terms. Our goal isn’t to make your creditors happy; it’s to get the best possible outcome for you.

Don’t let your debt rule your life any longer. Take control of your financial future.

Join the waitlist today.

Topics: Auto loan debt

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