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Our Subprime Car Loan Debt Crisis Will Keep Happening

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In recent years, regulators and law enforcement have vigorously pursued claims that subprime auto lenders have ensnared car buyers with high-interest loans that trap them in a cycle of debt. The fact this happens isn’t a new phenomenon; auto lending is a fairly unregulated practice, with the financiers themselves essentially left to police internal bad actions. And that almost certainly won’t change under the terms of a new reported settlement between subprime auto lending king Santander and a U.S. regulator.


Santander has agreed to settle with the U.S. Consumer Financial Protection Bureau over claims that it allowed borrowers to “make interest-only monthly payments without explaining that doing so would increase the total cost of the loan,” according to Reuters, citing three sources familiar with the deal.

There’s more: Santander also “failed to explain to customers how an insurance policy—known as ‘guaranteed auto protection’ (GAP)—would not always cover the costs of replacing a car that was destroyed in an accident,” the news outlet says.


Santander agreed to pay a fine and boost its internal controls, but Reuters said it couldn’t determine the amount. A spokesperson declined to elaborate when reached by Jalopnik.

“While we cannot comment on conversations with our regulators, Santander Consumer is committed to robust compliance and consumer practices,” Laurie Kight, the spokesperson, said by email. “We regularly review all of our practices, including consumer disclosures and call scripts, in order to ensure that the terms and conditions of our products and services are fair and appropriately disclosed.”

There’s a line in the Reuters story that I’m sure is jumping out to at least some of you—that Santander “allowed borrowers to make interest-only monthly payments without explaining that doing so would increase the total cost of the loan.”

Oftentimes, people write off stories of car buyers getting caught up in an exceedingly costly auto loan because, well, shouldn’t they know better? Why should they borrow several thousand dollars for a car that’s worth a fraction of the amount? And why should we care if people make lousy decisions?


But for many low-income, working-class folks, that’s the only option available to them. They need a car to get to work or run errands, and if they have low credit, turn to places like Santander which promise to finance their vehicle, so long as they accept an interest rate that can climb as high as 30 percent. If the monthly payment seems like it makes sense, then that can be all they need to sign off.

That’s why someone on the other side of the transaction is needed to explain to buyers what they’re getting into. Some consumers have simply never learned how credit works, and with auto dealers having enormous flexibility to set rates as they please.


That’s not how things work today, though. Sure, a financier needs to assess for risk when lending money to a subprime consumer, but the expectation that people will fail is effectively built into the model of some companies today. One of Santander’s competitors fully expects to repossess one out of every three cars it finances each year.

Even though lenders like Santander can’t issue loans with painfully high rates, auto dealers can—and then immediately pass off the loan to be serviced to Santander. The lenders could be taking on loans for people who don’t even realize they have a car to their name.


The industry saw record sales in recent years, and that had a lot to do with subprime auto lending reaching record heights. We’re starting to see some of the impacts of that. Outstanding auto loan debt is at a record high, north of $1.2 trillion. Loans with terms that last 84, even 96 months, are becoming more common, putting car buyers more at risk of default. A record 6.3 million people are more than 90 days behind on their payment. Even if subprime auto lending has been dialed back a bit, financiers are expecting to issue more securities backed by subprime auto loans than 2017's total of $25 billion. It’s a profitable market, why would they stop?

And so I feel like the reality of the situation is more akin to what we’ve seen in the past year with a company like Wells Fargo. Companies will pledge to rein in reckless practices, boot their internal controls, they’ll pay a fine, and life will go on.