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Comment by lefstathiou | Hacker News Reader

Selfish plug here but this industry is our bread and butter (our company hosts the data rooms and powers the marketing for the vast majority of subprime auto backed securitizations in the US). Below is a link to issuance volume going back to 2008. You'll see that big banks are not the leading originators in this market and at peak (2016) we're talking $26bn in loans (versus hundreds of billions in subprime mortgages). Additionally, unlike mortgages on second and third homes, people are far less likely to default on a car rather than a home because in suburban America, you need your car to keep your job, regardless of where you live.

Finsight Subprime Auto issuance profile: https://finsight.com/sector/Auto/Subprime%20Loan

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i think the point you are trying to make is that auto loans are safer but you failed to express two massive considerations:

first, and foremost, mortgages are secured against a physical piece of property that will almost always retain a significant portion of the original value. in the recession, homes might have lost 60-80% of their value, but they all bounced back reasonably over time. in contrast, a vehicle loses a huge portion of its value immediately and by the time a car is 20 years old, its not even worth repossessing.

second, homes can't move. you have a much better chance of repossessing a house than you do of repoing a car.

finally, just for fun. your claim that people are less likely to default on a car loan because they need to work is taken out of context at best, or possibly is just plain incorrect considering the prevelance of ride sharing tools and public transit. People only need to keep their cars for work.... if they have jobs.

> mortgages are secured against a physical piece of property that will almost always retain a significant portion of the original value.

REO is incredibly costly and moving a house off the books cannot happen quickly especially in a down market.

Cars are better in that way.

Most people will be upside down in their car loan but there's an international market for cars. It's pretty easy to liquidate a used car and capture some capital in the short term. Try that with a $450,000 McMansion.

Don't they just auction the place with no reserve? That's what I though happened to repossed houses. I could be wrong here.

Chances are someome will take out a new loan with one of the big banks to finance their new purchase. The bank gets to keep all the money already paid in by the original lender anyway.

you don't have to liquidate a 450k mcmansion, you just have to wait.

that will almost always retain a significant portion of the original value.

Is that true? Home values dropped 50%+ in some areas during the housing crisis. And when you're talking about a several hundred dollar home, that adds up quickly.

Cars have the disadvantage that they depreciate, but if you can repo them quickly enough, the losses can be contained.

And as someone else mentioned, cars are mobile, so if you repo one in California, you can always move it to Washington if it sells faster.

I'm guessing here, but considering how much value is lost just driving a car out of the show room, even a six month old repo'ed car is going to go for, what, maybe 50% it's original sale price at auction.

Whoever reposses the cars isn't interested in sitting on them for weeks to wait for the right buyer at the right price.

Used cars retain a lot more value than they used to. According to Edmunds, it retains 49% after 4 years

https://www.edmunds.com/car-buying/how-fast-does-my-new-car-...

That's trade-in value. Auction value is lower. Additionally, being repo'd is a hefty detractor to the auction price; plenty of dealerships categorically don't buy repo cars. Plenty of customers, too.

Plus the repo fee coming out of the auction price...

Nobody will finance a 20 year old car (outside of specialty collector markets).

Even 72, 84 months is insane. If you need to finance a car for that long to afford the payments, you need to buy a cheaper car.

http://www.cnbc.com/2016/06/02/us-borrowers-are-paying-more-...

> Average monthly payment: $503 — the first time the average auto payment has gone over the $500 mark.

> Average term for an auto loan: 68 months — this is the longest average term ever seen by Experian.

My current car is financed at 60 months... First time I've ever gone above 48. Will definitely be shopping used next time around.

Wow, this comes as great news for me. I felt terrible for years because I was paying 600/mo for a (special) car, that I paid off in exactly 5 years. I had a perfect storm of circumstances occur just as I was getting the loan, the banks no longer liked the risk, so it was financed by, like, the dealer's used car buddy a few cities over, and for a not-awesome rate. Long story short, all's well that ends well, still have the car, and I'm not as far off from the "average worst" as I thought.

I don't understand how people spend so much on cars when their net worth is under $5 million.

Do people not remember the economy can go in the toilet really fast? Why aren't people constantly scared and thus saving as much as possible and acquiring good assets? Even if the economy stays strong, your own career or profession can go bad or get disrupted real fast.

Personally I drive a fairly crappy car that I paid cash for, but I can see why people spend more on cars. Like cell phones they are luxury items that provide daily benefit to you. This is especially true if you're commuting long distances. For others a car is an extension of their personality. I'm not saying I agree with this mentality, but I understand it.

I don't think this is really about cars as much as it is about saving, and I can't speak for everyone, but I can speak for myself: my job pays crap. My last job paid crap. When my current workplace folds (which is likely to happen, and within a year) my next job will also be crap. It's not that the companies are poor, it's not that they're making little off my labor, they're making a packet, they just have a "take it or leave it" attitude towards pay. If they paid better - even just a reasonable rate - I would be saving as much as I possibly could.

As far as why people buy high end cars when they're not very rich, going into significant debt, I suspect it's because a car is a status symbol for so many people. If I could do without a car, I would. I'd be saving about $200 a month on my current expenses if I didn't need one - it's just a crappy old Mazda wagon, certainly no status symbol there.

For one, poor people don't usually have any money left over to save after covering most immediate expenses. The average person sucks at saving, but it's tougher to do with weak or volatile income.

The unfortunate reality is that (most) subprime borrowers don't have the luxury to consider catastrophic events that can occur in the future because they are too busy worried about today.

All of the safety and fuel regulations have sent the prices of cars into the stratosphere.

Any kind of large car that you would want for a family is well north of $30. I paid as much more for a 1 year old minivan recently than I paid for a year old BMW 15 years ago.

It's not just the additional mandated safety & economy features - buyers these days expect things like power windows and infotainment systems to be on the car. The only modern cars I know of with hand-crank windows are the sub-$15k cars like the Nissan Versa Note and the Ford Focus S.

You can get a nice, large used family car or minivan for much less than $30K. More like $10-15K. You can find good examples for less if you are patient.

I mean prices are going to be a little inflated over 15 years. Also you can get an incredible vehicle for $15 grand that is a few years old. Those safety requirements are something people (especially with families) are thankful for when they are put to use.

Absolutely, but while the cost of a car almost doubled, average salary increased far more slowly.

No, safety and fuel regulations did not send prices of cars into the stratosphere. In the 1960's suburbs of Philadelphia, gas was 30 cents a gallon, a nice new car was $3k, the house cost $30k, and Dad made $10k as a VP of engineering at a small firm. Right now, all three are almost exactly 10x what they were then; so cars have not gone up more than regular inflation.

And, to top it off, today's car reliability is way, way higher, as is the quality (in the 60's, we were thrilled if a car lasted 6 years and got 80k miles; nowadays, that's about half of what you'd expect. And the safety is wildly improved (like, for instance, air bags, never mind seat belts!)

Don't forget maintenance! Old cars needed far more maintenance far more often. This 6-7k miles every 6 months thing is just absurd.

Cars got oil changes every 1k miles, not 3k or 7k. Just for starters.

The shop down the street advertises 72 months completely interest free. Assuming it's not a blatant lie, of course I would sign up for 72 months instead of 12, regardless of what I could afford. That's 60 months of me getting return on whatever investments I make.

> Even 72, 84 months is insane. If you need to finance a car for that long to afford the payments, you need to buy a cheaper car.

Not sure I agree with that. My 72 month car loan, clearly not subprime, is 3%. I have better immediate uses for my money, I'm sure most folks can beat 3% returns over a 72 month horizon as long as your not paying 2 and 20.

Do you actually believe that even a quarter of people taking out subprime loans could afford to replace their car with Uber, assuming it's even available where they live?

Second, yes homes can't move, but the legal process you need to go though to evict, repossess, and resell a house is long and expensive. With a car, a repo guy needs just 5 minutes in a parking lot and the car's off to auction next month. Between automatic license plate readers and GPS trackers (for the absolute bottom tier), nowadays they're quite likely to get their chance well before a delinquent mortgagee would be evicted.

Sub prime Auto loans like subprime CC also have much higher interest rates so they can absorb far more defaults. Further, the loans are not nearly as long so if someone makes payments for 4 years much of the principle has already been recovered with 15% interest rates.

John Oliver had a segment on subprime lending back in August:

https://www.youtube.com/watch?v=4U2eDJnwz_s

According to the video, there was a 31.45% default rate in 2015.

Yes, but even at that high default rate you can make the math work. 100-31.45 X 1.15 = 78.83

so if you can sell the $31.45 worth of repo'd cars for more than $21.17 (100-78.83), you have broken even. 21.17/31.45 is 67% recovery rate. high, but doable for sure. even more so when you consider loans with 31% default rate probably have loan rates much higher than 15%

Assume you were referencing subprime home mortgages. I could be wrong. People are more likely to default on a subprime auto loan.

31.45% vs 8.96%

http://www.sgcaccounting.com/Resources/BHPHBenchmarks2015.pd... https://www.mba.org/2015-press-releases/may/mortgage-delinqu...

Source: sell BHPH software, work with DriveTime.

> people are far less likely to default on a car rather than a home because in suburban America, you need your car to keep your job, regardless of where you live

Also, it's a lot harder to repossess a home (i.e. foreclose) than it is to repo a car. Although, some of these advance repo methods are coming under closer scrutiny.

https://www.bloomberg.com/news/articles/2017-03-06/another-a...

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