I have been in the automobile business all my life. The used car dealership I run has been selling and financing cars for over 50 years. I understand that the term of the loan has to be long enough for the payment to be affordable, yet short enough so the customer can attain an equity position when he wants to trade and before the car completely depreciates.
I watched in disgust as the mortgage bailout bill was passed. This bill was proposed by most of the same people who had helped create the mortgage mess. I had wondered when the automobile and credit card lenders would try to arrange their own bailout. The automobile lenders knew they were cutting their own throat. Most people want to get a new car every 2-3 years. A car will typically lose around half of its value in 3 years. Most car loans are 5-6 years and are usually made with a small down payment. When the typical new car buyer drives his car off the showroom floor he owes $4,000-$5000 more than it is worth. This means that when the customer wants to trade up, he owes more than the car is worth. When he wants to trade, the difference between what the car is worth and what is owed is added into his next car loan starting a vicious cycle.
The captive auto lenders have gone along with this in order to help sell the product, even though the know a lot of these loans will blow up in their faces. The borrower knows that credit is easy to get. He will dump the present car on the lender and get one through another bank or finance company.
Typically the lender uses the stream of payments from current customers to fund new loans. If enough of the current loans default, the stream of money coming in isn’t enough to fund new loans. I would believe this is the root of the auto lenders problem, a problem that they foresaw, helped create and did nothing about. Why do they deserve the governments help and support?
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