Car sales are booming, largely due to the expansion of the subprime auto loan industry. But loaning money to people with little or no income has its downside -- namely, late or missed payments.
For these lenders, new technology has made this problem much more manageable. A device installed on subprime borrowers' dashboards enables lenders to remotely disable vehicles until loan payments are current -- a real boon to an industry that specializes in lending to people with credit scores as low as 455.
Investor hunger drives the subprime market
With investment yields low since the financial crisis, securitizing subprime auto loans has become increasingly popular, spurring more lending. Analysts estimate that subprime car loans have soared by 93% since 2009, and now make up about one-fourth of all new vehicle loans.
Though the explosive growth of subprime auto lending has prompted government regulators to initiate a probe into the industry, investors continue to lap up bonds supported by borrowers' debt. Sales of such securities peaked in 2006, at $27 billion; last year's sales, according to Bloomberg, reached $21.5 billion.
The secret sauce that makes lending to people with credit scores of 640 or lower, of course, is the high interest rates tacked onto these loans, which can sometimes top 29%.
Technology to the rescue
Obviously, these loans are apt to experience high rates of default, which makes the new technology so valuable to subprime lenders. Now, instead of dunning past-due account holders for months before repossessing the vehicle, a remote keystroke can render a vehicle unusable. The GPS-enabled "starter interrupt devices" can also pinpoint a car's location -- making it less likely that vehicle will be shut off while in use.
How well do they work? Very well, it seems. The New York Times spoke with a credit union lender in Louisiana, who noted that disabling a car in this way usually prompts a call "within minutes." Once payment is made, the device is inactivated.
Upsides and downsides
As the Times article pointed out, there are some issues with this technology. Some advocates claim the GPS tracking is a violation of borrowers' privacy, though it seems a necessary ingredient in order to activate the device safely.
There have been some instances when the technology was invoked haphazardly: some borrowers say that payments only three days late have prompted lenders to disable vehicles, and a woman in Nevada testified that her car was shut off while she was driving on the highway. One borrower profiled by the Times had her vehicle shut off several times this year, although she was not technically in default on any of those occasions.
Used responsibly, however, the technology can be helpful to subprime borrowers, who agree to the installation of the device as a prerequisite for obtaining the loan. Instead of having their car repossessed altogether, they will have to put up with the inconvenience of having their vehicle shut down when they do not pay in a timely manner -- much better for those who need transportation in order to stay employed. Without the technology, many would not be able to purchase a car at all.
For lenders and investors, the benefits are obvious. The technology is new, but it is gaining popularity among lenders, not all of whom might use it as safely or responsibly as they should. The state of Nevada is looking into regulating the use of these devices, and other states will hopefully follow suit. With protections in place, this new aspect of subprime lending can be of great value not only to lenders, but borrowers as well.
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