Car Repos Are Exploding. That’s a Bad Omen
barrons.com
barrons.com
Steve Cicala (2021)
At least I'm not a "heavy user" at a fast food chain (also real).
"Cash Cows: Burger Joints Call Them 'Heavy Users' -- but Not to Their Faces"
By Jennifer Ordonez Staff Reporter of The Wall Street Journal
Jan. 12, 2000 12:20 am ET
Similarly nonexecutive tech talent recruiting firms are often referred to as "body shops".
Ironic terminology is pervasive in business. Recent trends toward sensitivity are shifting patterns somewhat, but the old terms still find use.
The warden buffet underwear thing being a prime example. Every Walmart merchandiser now knows that “rule of thumb” and prices underwear against that “common knowledge”
That requires richer data than strictly following sales volumes, of course.
But the basic principle is still one of supply and demand, and following both shifts. The ability of retailers to adjust prices in near-real-time to demand shifts changes the behaviour somewhat. It doesn't demolish the concept of market function.
Back during the last pre-recession gas hike people couldn’t even give away their monster SUVs that they also couldn’t afford to put gas in. I was going to buy one for super-cheap but ‘cash for clunkers’ took care of that problem before I got around to it.
> Most of the loans on recently repossessed cars originated during 2020 and 2021, whereas origination dates are normally scattered because people fall on hard times at different times; *loan-to-value ratios, or the amount financed relative to the value of the vehicle, are around 140%, versus a more normal 80%*; and many of the loans were extended to buyers who had temporary pops in income during the pandemic.
That's CRAZY!
This means that lenders were, on average, willing to lend not only the full cost of the vehicle, but also up to 40% of the equity of a previous vehicle! (This sounds like a practice that is more common in subprime land, but still, this suggests that you can basically get a loan with weak proof of being able to pay it back).
This article reminds me of the Air France 447 crash [1].
The long and short of it is that the pilots thought they were level based on the data from the pitot tube sensor, but because it was frozen and a SPOF, they not only got bad data, but they didn't know that the aircraft was actually tilting slowly downwards for hundreds of miles! Eventually, the aircraft stalled unrecoverably and crashed into the ocean.
Auto manufacturers have been increasing prices on new vehicles (and dealers on used vehicles) partly due to supply chain tightening, but also due to a perceived increase in people's willingness-to-pay in response to the tightening and temporary pops in income. However, this article suggests that, like the pitot tube in the AF447 disaster, their WTP data is not only wrong, but sending them the opposite way (and taking their financial forecasting and future stock prices with them when they inevitably bring prices back down to Earth).
Gotta keep feeding its rebalances, no point in fighting or challenging the will of a god.
I get it that people get emotional about cars, but good heavens, this impulse puts you in the hole for years. It's almost as bad as cheating on your wife (and far, far worse than cheating on a gf).
Once you have that beater, you can start saving for something nicer. Find a make and model with decent reliability history that has hail damage or minor collision damage. It’s not hard to do.
If you can’t scrape together $2k to buy that beater then you have no business owning a car, period.
The problem is that people can't save. It'd be prudent to buy the car for $2k and save the remaining $3k somewhere to cover repairs instead of the 5k down payment.
Also, to be fair, what used to be a $2k Toyota was probably more like $5+k lately.
If you get a piece of junk for $2k and then have to put $1k into it again periodically, during that whole period you have either a pretty lousy car, or a non-working car.
And, as noted by the GP, that will often mean you need to call out from work. Which, for many of the kind of people who would be doing this in the first place, means a) they absolutely don't get paid for that day (all hourly work, no/very little PTO), and b) they will probably get fired if it happens more than once or twice.
Also:
> The problem is that people can't save. It'd be prudent to buy the car for $2k and save the remaining $3k somewhere to cover repairs instead of the 5k down payment.
You.....really don't see the problem with this?
People can't save. Not just "people are bad at it", "people can't manage money", "people don't know what's good for them". People literally do not have enough money to both live, and save. It's nothing to do with "prudence".
I'd estimate about 75% of the US population would have access to an Uber when the car needs to go to the shop (and $650 would buy a few rides). I wouldn't buy a 15 y/o Fiat/Chrysler but a Toyota or Honda should be decent enough not to need repairs every month, maybe every 6?
And (another thing most people skip) that can help a lot is preventative maintenance and regular checkups that you can schedule at your own convenience that would catch a lot of problems proactively. And you'll have to bring in your leased car too lest you want to get dinged even more at the end.
A cheap car isn't just something you buy and forget, it needs some planning and care that i honestly think most people can't handle. Probably because they're so overworked as you said. But is paying be nearly $30k over 3 years really going to get you ahead, just so you to get you reliably to your job every day to pay for that car? Or is it worth the effort to plan and manage a shitty car for 3 years to save 15k?
You know you need this car for 10+ years, you want it to suit you and your family, so you get a 20k loan and get the one you that will be best now. Why waste your time and money with the beater? You would spend morein the long run than the cost of the interest on the loan (essentially the cost of purchasing now not later)
Debt is a calculated risk, with a clear cost, and plenty of people are fully capable of doing the math.
Anymore though, many engines just aren't end user serviceable. I'm running a 2007 that requires partially dropping the engine to change the spark plugs, forget replacing a head gasket or alternator.
Yeah don't buy that 70k Lexus, probably don't buy any new car, but that beater you describe is probably $2k for a reason, and the average buyer doesn't have the skill set to evaluate what that reason is, and could easily find themselves needing another $2k beater in a couple years.
Best to go upmarket a bit and get a somewhat more expensive used car, and have it inspected by a mechanic (preferably one you know and trust) before buying. Don't trust the dealer inspection!
I have yet to see a vehicle that isn’t serviceable by an end-user. Sure some require more skill but the average Civic or Corolla isn’t hard to work on at all. If your intention is to work on your own vehicle don’t buy something more complex than your skills will allow.
...though of course many who finance cars aren't choosing to do that. The car you drive is both a status symbol and a personal luxury. I think many people would rather take on debt than get a vehicle they could only pay cash for.
Someone I know who recently moved to US, claims his less-than-a-year credit line is already at 770. It sounds a bit dubious but I would like to hear some validation about it. For e.g. it took me 4 years (admittedly on a junior researcher salary) to get to 780, so it surprised me.
But without spending thousands and repaying on- or before-time consistently over few financial quarters, how do some people manage to get so close to 800?
(Then, this is either a loophole or some kind of gaming the credit system ? This would be very exciting to understand, if it is)
Also, buying a new car is much less of a hassle than buying a used one. The price difference between used and new ATM isn't so much to cover the extra hassle for many buyers. You want the car to be something that doesn't cause stress in your life, like many want a spouse/partner who isn't a constant drain on their emotions.
And then there are the many conveniences that are nice if you can afford it, but only if you can. It is purely a lifestyle upgrade, and not important to everyone, but it definitely makes some people happier, especially if they drive a lot.
I've heard people say this, but it's never made sense to me and sounds like something the loan industry has convinced people of just to sell more loans. Is it actually true?
Every time I've gotten a mortgage, they seem to just care about my income and whether I've had any missed payments on credit cards or other bills before.
And credit scores aren’t everything. Even with an >800 and money in the bank, after my startup was acquired, I couldn't get a mortgage because I didn't have any income I could show them.
Ya, not having income is a blocker, but you also need to take care of your credit score. I basically had no credit score because I was out of country for 11 years (and..unlike new immigrants, they don't give Americans a benefit of the doubt here), so credit cards and an auto loan was really important when I came back (not having had a car for 11 years made my insurance premium go up, also).
For sure, current income is a more important predictor of future income and future sufficient income is a predictor of future payment.
Installment loans are a decent part of credit scores, but mortgage lenders look into the details, so credit score isn't everything to them like it can be for smaller loans.
Cheap financing close to 0%, and long term contracts. In fact, financing on new vehicles is far far better than financing a used vehicle. Why would anyone vinance a used vehicle? Because even used they cost more money then most have in their bank.
Used cars require repairs, meaning they require a place to do these repairs or extra income to cover a mechanic. Also how does one recover from vehicle related downtime in a car centric society? These things should be priced in.
So, how much money does one need to get into a used vehicle and how much safety net do they require? Mind you, during covid car market flipped on its head, new cars were (and still are) 3-6-12-24 months wait, and used car market saw a massive increase in prices.
Financing for new cars is often available at rates that are so low, you'd be completely foolish to pay cash.
> preferably used?
Yes, the amazing financing is certainly one of the incentives for buying a new, rather than used, car. That's why the manufacturers offer it.
In most market I feel you can safely earn at least an ~8% return if you invest fairly conservatively.
Why would I forego an 3-8% return on my money by paying cash for an asset that's just going to depreciate?
Because new cars are nice, and people are bad at time value of money? Also I think it's partially a cultural thing, very few of my friends and family buy brand new cars but I know some people would never even consider a second-hand vehicle.
> It's almost as bad as cheating on your wife (and far, far worse than cheating on a gf).
What a curious point for comparison! Although I get your point if you just mean purely financially.
> The CPI is up over 35% for used cars and trucks as reported by the BLS, versus new vehicles, which are up 12.5% [0]
That is, if you had wanted to by a new or used car last year and followed this advice you would have had to save an additional 12.5-35% to be able to purchase the car in following year.
Please let me know where from 2021 to 2022 I could reasonably planned to have put my money and saw gains north of 10% let alone 30%?
If you had saved for your car while I took out a loan not only would I have had started receiving value from that car a year earlier than you, I also would have saved money in the long run since most interest rates have been lower than inflation. In fact I could sell that car to you (or someone like you) now that you've finally saved up enough paying off my loan, getting to drive the car for a year, and likely still making more cash despite the depreciation of the car. Even if I had the cash on hand it would have been better to put that cash towards some non-depreciating asset or improvement.
If there are low interest loans for anything you need, especially in a time of high inflation, it almost always makes more sense to finance it then pay full cash.
Having more and more of consumer spending being credit based is a well known problem in our current economic environment but it's hardly the result of a moral failing as you paint it.
0. https://www.bankrate.com/insurance/car/inflation-and-rising-...
As others have pointed out below, some people don't have enough cash to buy a car when they need one.
Other people have enough money to buy a car, but wish to purchase a nicer car because of vanity or enjoyment reasons.
And other people are in the middle: they could afford to buy a low-end vehicle in cash, but they realize that the transaction costs involved with every purchase (sales tax, time spent searching/selling) are not worth buying a $5k car, then a $10k car, then a $20k car in the next 5 years. So instead they finance an $18k car and hope their job trajectory continues as planned.
I highly doubt his time spent at the tag office and at the dealer buying those cars is going to be worth more than ~$1,500, which is roughly what you’d pay in interest for a 5 year note at 3% interest.
Factor in the time spent selling the vehicles (or getting screwed by the dealer on trade-in value), and it's much easier to see why financing a single more-expensive purchase could make financial sense.
Of course, this doesn't apply in states with low/no sales tax.
Remove the second transaction and the associated $800 sales tax and it’s basically a wash. Live in a state with sensible tax rates and it’s a no brainer.
As for moving to a state with sensible tax rates, I think the moving costs or proximity to family/jobs would probably swamp the tax benefit for most people. But in the long run, people will surely take these factors into account (and perhaps are already, given recent trends!).
In Europe it's not so easy to get credit, and interest rates are usually higher (in my country, even before the current situation, car loans were close to 10%). It is usually more expensive to take credit, except maybe with real estate.
if you do, imagine that, but for a car.
some people (myself included) hate driving old cars and don't mind the monthly cost of paying for a car loan.
"The reason that the rich were so rich, Vimes reasoned, was because they managed to spend less money. Take boots, for example. He earned thirty-eight dollars a month plus allowances. A really good pair of leather boots cost fifty dollars. But an affordable pair of boots, which were sort of OK for a season or two and then leaked like hell when the cardboard gave out, cost about ten dollars. Those were the kind of boots Vimes always bought, and wore until the soles were so thin that he could tell where he was in Ankh-Morpork on a foggy night by the feel of the cobbles. But the thing was that good boots lasted for years and years. A man who could afford fifty dollars had a pair of boots that'd still be keeping his feet dry in ten years' time, while a poor man who could only afford cheap boots would have spent a hundred dollars on boots in the same time and would still have wet feet."
- Men At Arms, Terry Pratchett
If you can afford to buy a decent car today, you'll still have a decent car in a few years, and have only put some basic maintenance into it.
If you can't afford to buy a decent car today, you still need a car today, so you're going to buy what you can afford. Then in a few years, your crappy car will have crapped out (even with more-than-basic maintenance), and you need to buy another one.
So, ten years down the line, you will have spent more on cars than the well-to-do, and you'll still be hearing a weird rattle in the engine every time you make a left turn.
But that's not the story at all!
I'm sure if they felt that they wouldn't be able to repossess, they wouldn't be nearly as incautious in extending the loan.
My note: even though employment and wages are strong, the aggregate consumer is not as strong as your usual indicators appear to be.