High Risk, High Tech Loans

Starter-interrupt devices are beginning to be used in risky car loans. If a consumer falls behind in making payments, the car won't start. In this case, technology is doing two things. First, it is displacing labor. With these machines, "Repo Men" are no longer needed, at least not in the same numbers. Second, it is reducing the risk of loans in the automobile market which enhances its efficiency:

For Some High-Risk Auto Buyers, Repo Man Is a High-Tech Gadget, LA Times/AP: Rashida Redd punched in a six-digit code in her Pontiac Grand Prix... The 34-year-old Pottstown, Pa., mother of five had to file for bankruptcy protection about a year ago in the face of mounting medical bills from her husband's open-heart surgery.

Despite her poor credit history, Redd was able to lease the 3-year-old car ... on the condition that it have a starter-interrupt device. ... The cigarette-pack-size device [is] mounted under the dashboard.... If she misses her $94 weekly payment, it won't let her car start.

Starter-interrupt devices are becoming a popular way for lenders to ensure that they get paid, and consumers seem willing to accept them to get into nicer cars, use a smaller down payment and qualify for a lower interest rate... Consumers with poor credit often face interest rates of more than 20% — nearly triple the rate that drivers with good credit can get... They also have to make a down payment equal to 10% to 20% of the car's purchase price, while buyers with good credit can buy a vehicle with little or no money down. ...

[T]he devices were mainly geared for the "buy here, pay here" market — consumers with the lowest credit scores. Typically, these buyers have filed for bankruptcy protection or had a repossession. "Buy here, pay here" customers also are limited to how expensive a car they can buy, typically no more than $5,000...

Where else could these be used? Home appliances such as washers, dryers, and refrigerators that won't function if payments are missed? Something about this feels intrusive, but I can't think of any reason to oppose it since it would allow more people to purchase these items on better terms.

Comments

[Nicholas Weaver]

Cars are somewhat unique:

WITH certanty of payment, the risk is reasonable: You mandate insurance (which you can verify), and with certanty of payment, the risk is low and the dollar value of the loan itself is reasonably high.

Appliances are MUCH lower value, and they don't hold their value as much, and are much more fudgeable (a fridge is a fridge is a better first-approximation than a car is a car).

Also, its a pretty damn high rate still. A 3 year old Grand Prix is <$18k KBB retail for the most expensive version. So the $95/month lease comes to $5k/year. So a 3 year lease is the full value of the car. Given after 3 years you could still probably sell it for $9k, its a pretty high profit lease.

[Nicholas Weaver]

Well, full value of the car for the car dealer, not the consumre price... But still, its a pretty high lease rate

[Richard]

Why wouldn't the cash-challenged consumer in question simply hack the device? I bet that for $50, some automotive and / or computer geek type could be found to disable the device. While there's no reason why such a device could not be made integral to the vehicle at manufacturing time, and perhaps such a market will develop, I suspect that most such devices are add-ons and easily voided.

Even if this becomes standard, I'd put my money on the hackers. There are few security regimens that can't be hacked in some fashion -- especially when the vehicle is in a garage and subject to a blowtorch.

[anne]

Please, where is the imagination in all this. What is need is a device that first slaps you silly, second threatens your parents, third acts out the threat.

[Humbug]

There's a reason they don't bait traps with vinegar.

Sure, given a "lower" interest rate, the privacy invasion almost seems worth it. But later, when these devices are "accepted" by more people, interest rates will go up to where they are now.

The arguments for the trade in privacy will have evaporated and for this demographic, getting a car without the starter-killer will be nearly impossible.

Will the trade be worth it then?

[rmark]

Back before WW2 some home electricty was paid for by dropping coins in a meter box. Pay as you need it.

[anne]

http://www.nytimes.com/2006/06/01/us/01minorities.html?ex=1306814400&en=a6c77c65d8986cb9&ei=5090&partner=rssuserland&emc=rss

June 1, 2006

Black and Hispanic Home Buyers Pay Higher Interest on Mortgages, Study Finds
By ERIK ECKHOLM

Black and Hispanic home buyers entering the fast-growing market for subprime mortgages tend to pay higher interest rates than whites with similar credit ratings, a statistical study by an advocacy group says.

The subprime industry makes loans at higher interest rates to people who cannot qualify for regular mortgages.

"When we compared borrowers with the same risk characteristics, African-Americans and Latinos were still more likely to get the higher-rate loans," said Debbie Gruenstein Bocian, a researcher at the group, the Center for Responsible Lending.

A spokesman for the mortgage banking industry challenged the conclusion, saying the report did not take into account all the legitimate questions about family wealth and debt, house appraisal and other factors that underwriters must consider when making a loan.

Racial disparities in mortgage lending have been studied and debated for decades, with the focus shifting in recent years from the practice of denying mortgages in certain minority neighborhoods, or redlining, and a lack of loans for minorities to the pitfalls of the subprime industry.

As many as one in five home loans are now subprime, totaling more than $500 billion a year, said Keith S. Ernst, an author of the report who is an analyst at the lending center, in Washington.

Borrowers typically pay two percentage points higher than they would for conventional loans. Some, judged the riskiest cases, are charged higher rates, forcing them to pay hundreds of dollars extra a month.

The study, using federal and industry figures from 2004 to analyze a sample of 50,000 loans, found that among subprime borrowers with similar credit ratings, blacks and Hispanics were 30 percent more likely than whites to be charged the highest interest....

[anne]

There are, by the way, persisting patterns of ethnic discrimination in the high risk home lending market that are disturbing but long and widely ignored.

[Bernard Yomtov]

A reasonable argument against putting such a device on a refrigerator is that the damage from turning off the refrigerator will often be much greater than just loss of the appliance's use. Food spoilage can create both financial and health problems for the cash-strapped household. Further, you may not know the refrigerator has been turned off until too late.

Does this argument extend to other cases? Well, with cars a warning/reminder - like a flashing light - would be nice. Who among us has not overlooked an occasional bill? The car suddenly not starting could cost someone a job. Where's your weekly payment then, Mr. Dealer?

[calmo]

So enforcement of the customer side of this transaction is implemented, what about the dealer side where the car is a lemon and the dealer won't give you another one even after numerous breakdowns? Is there another black box that could be invented to make sure his vehicle is disabled until his customer's claims are satisfied? We could invent one to make sure this business transaction is symmetrical. Car dealers' reputations are at risk without this handy little device people.
Another point in its favor: lawyers seem to be circumvented by the use of this coercive little device.

[Holly W.]

Imagination, indeed -- thanks for making me laugh, Anne!

[Cash Advance]

Very interesting blog, you got a new reader for sure!