A car is a necessity in today's sprawling society. You need a car to get to work, buy groceries, get to a doctor. Sure, there's public transportation, but buses and trains often don't go from Point A to Point B, and it can take hours (depending on where you live) to get something as mundane like a gallon of milk.
But how to do you get a car if you have bad credit? The Credit Acceptance Corporation is one of several companies whose business model is centered about subprime car loans -- in other words, providing loans to people with bad credit. And while that may sound like a good thing, the Michigan based auto lender has come under fire for business practices that are completely legal, but some would argue, unethical.
That's because the statistics tell the story. According to Auto Finance News, the subprime market -- those with credit scores of 620 or less -- has increased 72% since 2011. In 2016 alone, one in five loans went to subprime borrowers. While the market is clearly there, so are the risks -- independent auto financing companies have delinquency rates approaching 10% of of September -- more than twice that (4.4%) or traditional banks.
Delinquencies among non-bank auto lenders have soared to near recessionary levels today since 2013. Those independent auto finance companies have an average delinquency rate of 9.7% as of September, compared with banks and credit unions that have an average rate of 4.4%, according to data from the New York Federal Reserve.
These independent finance companies have favored extending credit to people with subprime credit scores of 620 or lower, a segment that has increased 72% since 2011. Last year, about 20% of all new car loans went to subprime borrowers.
So it's no surprise people with bad credit can't afford to pay their loans, and when that happens, the finance companies pounce. According to plainsite.org, in Detroit Michigan, one in every eight civil lawsuit involved Credit Acceptance suing its borrowers. Overall, 72% of the suits end with the company garnishing the wages or tax refund of the former borrower.
How bad is it? The average used car loan ranges between 3 and 10 percent, with the average at 4.21%. But a story in the Pittsburgh Post-Gazette noted this:
A deep subprime interest rates of 21 percent -- the highest allowable in Pennsylvania -- for a $5,000 car financed for six years means paying $3,832 in interest. The same car and terms for a consumer with great credit and an average used car interest rate of 3.76 percent will bring in just $592 in interest.
What does all of this mean? Legally, nothing. These companies are operating without the law, and they're building profitable businesses doing so. The ethics of loaning money to people who could very well default hearkens back to the subprime mortgage days, when banks loaned money to those they shouldn't have.
The same's happening in the car business, and it gives a new meaning to "buyer beware." Beware that if you can't afford a massive interest rate on your car payment, you could lose it and have your wages garnished.