New Auto Lending Study Reveals Similarities To Subprime Mortgage Crisis by MagnifyMoney
Recent reports reinforce that delinquencies are reaching historic highs and losses are climbing. MagnifyMoney wanted to look beyond the numbers and understand how consumers were shopping for auto loans, how lenders verified the creditworthiness of customers and whether the process looked like the subprime mortgage market. Unfortunately there are a lot of similarities. Given the answers to the survey, the recently reported delinquency numbers are not particularly surprising.
MagnifyMoney conducted a national survey of 673 Americans who own automobiles. And they found that:
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- 4% of auto loan borrowers let the dealer find them a loan
- 1% of auto loan borrowers never had their income verified when they applied for the loan
- 6% of auto loan borrowers who took out a loan with a term longer than 5 years did so to lower their monthly payment. The remaining consumers did it because “it was the dealer’s idea.”
- Only 34.9% of borrowers shopped online for a lower interest rate before walking onto the dealers lot
Former banker turned consumer advocate and founder of MagnifyMoney Nick Clements believes the survey offers us a warning:
- Regulators need to recognize that many of the “underwriting failures” present in the subprime mortgage crisis are present in the subprime auto market. Dealers resemble the mortgage brokers, making money on the sale of cars and the dealer discount from lenders. Verification requirements are minimal. Complexity is increasing and the opportunity to commit fraud becomes more widespread. At worst, borrowers are talked into exaggerating their income on an auto loan application to get approved for a bigger loan. Given the limited verification and perverse incentives, this could be happening today.
- Consumers need to protect themselves. They should shop for a rate before walking onto the lot, and then let the dealer beat it. They should set a budget based upon the cost of the car and not just the monthly payment. And they should keep the term as short as possible, given t