Auto Lenders Profiting Off Most Vulnerable Customers

Auto Lenders Profiting Off Most Vulnerable Customers

Becky Perrin saw a 2014 Chevrolet Camaro for sale at a local dealer in late 2019 while looking for a used car to run errands and go to doctor's appointments.

When Perrin bought the sedan, she had the dealer arrange the financing, as most Americans do when getting a car loan. According to Perrin's complaint in a later lawsuit, the dealer secured the loan through Michigan-based Credit Acceptance Corporation, which mostly caters to people with bad credit. 

The loan ended up costing Perrin more than she could afford, and she quickly fell behind on her payments. Then Credit Acceptance repossessed her Camaro, forcing her to rely on friends and family for rides.

According to Kathi Rawls, an attorney who represented Perrin in her recent lawsuit against Credit Acceptance, Perrin's story is not unique. 

Rawls did not comment specifically on Perrin's case, which was settled in October. Yet, according to her, "Lenders often recognize in advance that their customers will not be able to repay the loans they are given, but still agree to let them purchase cars from dealerships." 

This is because, she explains, lenders are well aware that even if borrowers default, they can still make money in other ways. 

Among its competitors in the subprime auto, the lending market is Texas-based Santander Consumer USA. Two attorneys general have accused Credit Acceptance and Santander Consumer USA of engaging in unsavory practices by putting borrowers in risky loans they know are doomed to fail.  

Moreover, even when Santander or Credit Acceptance have a defaulter, they still make profits. Several states, including Mississippi and Massachusetts, have sued the lenders, charging that they abused their power to "extort as much money out of delinquent borrowers as possible."  

A Consumer Reports review of legal documents and regulatory filings revealed that lenders are working with dealers to mark up cars sold to low-income borrowers more than they do for customers with better credit or to upsell them into cars they cannot afford. The attorneys generally accuse lenders of structuring loans and arrangements with dealers so that they almost guarantee a profit even if borrowers default.

According to the documents reviewed by CR, lenders aggressively collect debts by repossession and wage garnishment when borrowers fall behind.

It seems some lenders have a business model that expects repossessions, maybe even wants them, says Pamela Foohey, a professor at the Benjamin N. Cardozo School of Law who has done a great deal of auto lending research.

Basically, it's good business to write bad loans. For people with bad credit, it's a risky model. Interest rates are sky-high, and they eat up a lot of their income with monthly payments that are often 72 months or more. 

People's lives can get turned upside down when that happens. A person's car is repossessed, and they lose their wages and tax refunds, which creates a vicious cycle that makes it hard to get a job, pay rent or hold down a job.  

Sanchez declined to comment on specific questions but said it is a "responsible lender" operating in a highly regulated environment.
Laurie Kight, a spokesperson for the company, said they treat their customers as individuals and try to find financing solutions that work with a wide range of incomes and credit scores. 
Loan modifications and deferments are available as a last resort if a customer falls behind on their payments. If they get late on their repayments, the company will offer loan modifications and deferments as a last resort.

Credit Acceptance also wouldn't comment on specific legal questions. 
In a statement, Credit Acceptance said it's been in business for nearly 50 years because it offers financing programs through car dealers to help credit-challenged and credit-invisible consumers get their first car or rebuild their credit. 

Josh Lauer, an associate professor of communications at the University of New Hampshire who writes extensively about credit scores for auto loans, says credit scores are a double-edged sword. Because of credit scoring, more people can get loans, but for some, those loans can be a financial disaster. 

"It helps unethical lenders find vulnerable borrowers and take advantage of them," Lauer says. "Most lenders are probably trying to make money, but they're doing it ethically."

It's not so risky, after all.

Lenders offering used-car loans to consumers such as Perrin frame their business model as a big gamble. They are taking a risk on subprime borrowers, generally those with a credit score of less than 650. 
They argue that these borrowers are riskier to lend to than individuals with a high credit score, which justifies their high-interest rates. 

According to a study, individuals who obtained loans from auto finance companies, who typically have lower credit scores, were more likely to pay higher interest rates and have difficulties paying back their loans than those who obtained loans from banks or credit unions.