The Relationship Between Sub-Prime Auto Loans and Rising Vehicle Repossession Rates

Inside Subprime: Oct 30, 2018

By Ben Moore

Earlier this year, Business Insider stated that the subprime auto loan delinquency rate across the nation is worse than the financial crisis ten years ago.

Motor vehicle repossession rates have risen across the United States despite the country’s economic growth spurt and decreasing unemployment rates. According to data from the California Department of Business Oversight, vehicle repossessions grew in the state by 21% in the year 2017 to 44,897 repossessions. In 2013 there were just 13,167 vehicle repossessions, comparatively. 

During the recession, many people prioritized their car payments over their mortgages, reasoning that they could live out of their cars in a worst-case scenario. Mortgages went delinquent, but car payments remained on time, and vehicle repossession rates remained relatively low. As the years went by, more and more Americans began to utilize subprime auto loans to secure vehicles which would allow them access to jobs that required transportation. (Subprime auto loans are often attractive to underbanked consumers who otherwise feel they have to rely on the secondary economy of payday loans and auto title loans.) However, missed payments associated with subprime auto loans can quickly result in vehicle repossession. Most vehicles attached to a subprime loan that enters delinquent status get repossessed after just three months of negligence.

The growth in technology has also coincided with the rise in vehicle repossessions. Advanced camera technology has improved the ability to locate vehicles associated with delinquent loans, and some cars are even equipped with a mechanism that disables the car from starting if loan payments are late.

In addition to these technologies, policies are being created that could have a growth effect on vehicle repossessions. The state of California has introduced a new bill, Assembly Bill 516, that will “require [vehicle] consumers to display temporary tags with prominent, easily scanned, expiration dates set to expire 90 days after purchase.” Consumers that fail to install their permanent plates after the temporary tags expire will be subject to being pulled over and having their vehicles impounded. Rosemary Shahan, founder of the Sacramento-based nonprofit, Consumers for Auto Reliability and Safety, fears the bill will open the door for thousands of people to be wrongfully pulled over and potentially lose their cars. If the driver were to be an undocumented immigrant, that person could also face deportation. Those who risk altering the temporary tag could also be charged with felony and face possible imprisonment.

However, subprime loans entering default status continue to represent the bulk of repossessions, with both drivers and loan providers being affected. Subprime loan providers tend to borrow from big banks in order to fund the loans they provide to their high-risk customers. When their customers’ payments go missing, they can be shut down. Several specialized subprime auto loan providers filed for bankruptcy. Their customers struggled to make loan payments because they were burdened by double-digit interest rates. As more of these loans are being borrowed across the country, the vehicle repossession rate is expected to rise significantly.