01 Jun Sub-prime Loans are Back – this time in Auto Loans
An article in this past week’s issue of the online publication Collection & Credit Risk raises the question of whether the spread of sub-prime loans in industries other than mortgages could prompt a replay of the Great Recession of 2009.
According to credit bureau Experian, financing for new and used vehicles to borrowers with credit scores less than 680 comprised almost 42% of all automobile financing during the first quarter of 2011, and the trendline for this type of financing is on the rise.
Industry experts note that the wholesale (used) car market is very strong. Repossession is relatively easy and used car valuations are up. This has attracted more lenders to market towards credit challenged individuals. GM, which sold GMAC and exited the car financing business several years ago, has quietly re-entered the vehicle financing business by purchasing a sub-prime lender (now named GM Financial). Other large financing companies are expected to follow suit.
Bankruptcy provides little relief to sub-prime auto buyers who end up in bankruptcy. In Chapter 7, lenders have little incentive to negotiate better terms for reaffirmation agreements, since the infrastructure to resell recovered vehicles exists throughout the country. Reaffirmation of a sub-prime auto loans is perhaps even less of a good idea than reaffirmation of mortgage debts.
In Chapter 13, the “910 day rule” insures that sub-prime lenders will retain their sky high interest rates on vehicle loans – you cannot use the power of the bankruptcy court to modify principal balances or interest rates until more than two and 1/2 years have passed since you purchased your car.
In my view, the best course of action for Chapter 7 and Chapter 13 debtors often involves surrendering their vehicles back to the lenders. Because cars and trucks are depreciating assets, dispensing with overpriced vehicles and high monthly payments may be the most appropriate option.
Jonathan Ginsberg, Esq.
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