Used cars are not good deals any more!

[paramount]

GM Ramps Up Risky Subprime Auto Loans To Drive Sales

President Obama has touted General Motors (GM) as a successful example of his administration’s policies. Yet GM’s recovery is built, at least in part, on the increasing use of subprime loans.

The Obama administration in 2009 bailed out GM to the tune of $50 billion as it went into a managed bankruptcy.

Near the end of 2010, GM acquired a new captive lending arm, subprime specialist AmeriCredit. Renamed GM Financial, it has played a significant role in GM’s growth .

The automaker is relying increasingly on subprime loans, 10-Q financial reports shows.

Potential borrowers of car loans are rated on FICO scores that range from 300 to 850. Anything under 660 is generally deemed subprime.

Subprime Key Driver

GM Financial auto loans to customers with FICO scores below 660 rose from 87% of total loans in Q4 2010 to 93% in Q1 2012.

The worse the FICO score, the bigger the increase. From Q4 2010 to Q1 2012, GM Financial loans to customers with the worst FICO scores — below 540 — shot up 79% to more than $2.3 billion. The second worst category, 540-599, rose 28% from about $3.4 billion to $4.3 billion.

Prime loans, those above 660, dropped 42% to $676 million.

GM Financial provides just over 8% of GM’s financing. Prior to 2006, GM’s captive lending arm was GMAC, but GM sold a controlling stake in 2006. GMAC later renamed itself Ally Financial and continues to provide the bulk of GM’s financing.

At the peak of the credit crisis and recession in late 2008, Ally announced that it would move away from subprime lending.

By spring 2010 GM’s new management, led by North American executive Mark Reuss, wanted to move back into subprime, fearing that GM couldn’t compete.

Subprime lending in cars is not as risky as in housing. Car loans are cheaper, so customers have an easier time making payments. When they do go into default, the cars can be repossessed and sold to recover some of the loss.

“The subprime market grew as a result of the recession,” said GM spokesman Jim Cain. “Our experience, however, is that with proper management they are very good risks.”

He points to GM’s credit losses which have not risen above 5.5% since late 2010.

Nevertheless, since it acquired GM Financial, GM has seen its subprime loans grow from about 4.8% of sales in Q4 2010 to 8.2% in Q1 2012. The industry average is about 6%.

“Is GM taking on more risk than is safe given our uncertain economy?” asks Edward Niedermeyer, TheTruthAboutCars.com editor-at-large. “They may be trying to goose short-term sales with subprime lending to boost its stock price, which is tied to the government getting out of its GM investment.”

GM still owes about $26.4 billion in direct aid to the federal government. The Treasury owns 26.5% of the automaker, or 500 million shares. The stock price would need to be 53 to recoup those taxpayer costs.

GM shares closed Friday at 19.67 after hitting a post-IPO low on Wednesday.

Subprime ‘Double Standard’

When pushing the Dodd-Frank financial overhaul, Obama told Americans, “you have a stake in it if you’ve ever tried to take out a home loan, a car loan, or a student loan, and been targeted by the predatory practices of unscrupulous lenders.”

While the administration has targeted subprime mortgage lending, it seems to have turned a blind eye to auto subprime loans.

“The Obama administration has seen to it that the Consumer Financial Protection Bureau is important in the subprime mortgage arena,” said Niedermeyer. “But it has exempted auto-finance from that. I definitely think it is a double standard.”

He also wonders if the Treasury will be able to recoup its GM aid: “The conventional wisdom has been that consumers have too much debt and need to de-leverage. Having that weak underlying foundation makes this rise into subprime lending by GM more worrisome.”

[EconProf]

In the debate between buying new vs. used, the sales tax should be considered. What is the rationale for a sales tax to be levied on a used car purchase? None. The car has already paid a sales tax when sold new. In fairness, it should never be taxed again. A car that changes hands enough times in its life could theoretically pay more in sales tax to the state than its value when new. This undue revenue to the state is paid by the consumers, especially poorer consumers who tend to buy used.
The only way to beat it is to buy new and then keep the vehicle till its value is nil.

[spdrun]

Sales tax is on SALES, not a value-added tax, so taxing used items is theoretically correct. Since you have to pay sales tax either way, this still favors used, since you’re paying tax on a lower purchase price.

Poorer?

[EconProf]

Sales taxes exempt a lot of things, and ought to exempt used items. It is actually a form of double-taxation.

[jstoesz]

Coincidental timing on this thread for me. I found a crack in my plastic radiator of my 210k mile Honda a few days ago, and decided to replace it. 2 hours and 120 bucks later the job is done. Dealers charge 4 or 5 times that to replace. High mileage used cars make lots of sense, but only if you can do a most of the little stuff yourself. Fortunately, because the car is worth nothing, you don’t have to worry about breaking something when you do the work yourself.

I am crossing my fingers to keep this car going another 50k miles. Who wants to blow all that money on a new car, hell my AC still blows strong and cold. Honda all the way!

[Diego Mamani]

[quote=paramount]Near the end of 2010, GM acquired a new captive lending arm, subprime specialist AmeriCredit. Renamed GM Financial, it has played a significant role in GM’s growth (…) The automaker is relying increasingly on subprime loans, 10-Q financial reports shows.

(…)
GM Financial auto loans to customers with FICO scores below 660 rose from 87% of total loans in Q4 2010 to 93% in Q1 2012.[/quote] What will happen when GM Financial goes under? Uncle Sam will bail it out, of course. And it won’t matter whether Obama or Romney are in the White House.

[sdrealtor]

My GMC is still going strong at 140K miles. I only drive it half time now but I am crossing my fingers this car does not go another 50K miles. I hate driving it but I’m too cheap just to dump it.

[Coronita]

[quote=Diego Mamani][quote=paramount]Near the end of 2010, GM acquired a new captive lending arm, subprime specialist AmeriCredit. Renamed GM Financial, it has played a significant role in GM’s growth (…) The automaker is relying increasingly on subprime loans, 10-Q financial reports shows.

(…)
GM Financial auto loans to customers with FICO scores below 660 rose from 87% of total loans in Q4 2010 to 93% in Q1 2012.[/quote] What will happen when GM Financial goes under? Uncle Sam will bail it out, of course. And it won’t matter whether Obama or Romney are in the White House.[/quote]

Did you expect that people wouldn’t try sub-prime loans again? Those loans are the bread and butter.

[Author]

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