Shotguns For Downpayments? We May Be In For Another Subprime Problem

April 5, 2013

Earlier this week, we offered a rundown on auto sales for March. While we were very happy to see a number of manufacturers set new records, we were a little concerned that some of the market's strength might be due to an easing of credit restrictions. After all, we remember where that got us last  time.

Most analysts don't think we're in danger of another subprime snafu. However, this story of an Alabama auto dealership that accepted a shotgun as downpayment from a man with poor credit isn't helping us sleep better at night.

When Jeffrey Nelson of Jasper, Alabama went shopping for a car last year, he wasn't too optimistic. He was a fairly low earner who'd already had one vehicle repossessed, and he was acquiring a growing stack of medical bills. 

So he was surprised when Maloy Chrysler Dodge Jeep arranged for him to take out a loan of over $10,000 to purchase a 2007 Suzuki Grand Vitara. He was probably even more surprised when the dealership took his 12-gauge shotgun for the majority of his downpayment.

Ultimately, Nelson's loan was the result of U.S. economic initiatives that began in 2008. Many of those projects have been hugely successful: record-low interest rates on mortgages, for example, have helped resuscitate the housing and construction markets, which have, in turn, spurred truck sales, which have been further aided by low-interest car loans. 

But there are always a group of folks willing to make a buck -- or several million of them -- by taking advantage of good policies and using them for not-so-good things. Subprime lenders are an excellent example of this principle in action: there are now 6.6 million subprime loans on the books, and that number jumped 18% between 2011 and 2012 alone.

Of course, subprime borrowers (generally speaking, those with FICO scores below 640) represent significant risks for lenders, and those lenders charge accordingly. The interest rate on Nelson's loan, for example, was a staggering 21.95% at a time when most other rates were in the low single digits.

When Nelson divorced his wife and moved out of his home, he could no longer afford the loan payment to Exeter (a subprime lender that seems to be a division of AmericCredit, which is now owned by General Motors). Thankfully, his wife was able to take the car note -- and the car -- but Nelson was left to file for bankruptcy.

The moral of the story? As we've said time and again:

1. Evaluate your financial situation honestly before taking out a car loan. Understand what you can and can't afford.

2. Read the fine print. There are some shady dealers out there, and with them come shady deals.

3. Like grandma said: if it sounds too good to be true, it probably is. It's okay to walk away.

[h/t John Voelcker]

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