Sub-Prime Auto Loan Scams Drive People Into Filing Bankruptcy in New York City

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Every week I file bankruptcy for someone who has little or no credit card debt.  These individuals are not being cornered by high interest credit card debt; they are being crushed by a debt of $10,000, $20,000 or more on a car loan – for a car they no longer even have.  This is a terrible debt for most families and in many cases bankruptcy becomes the only option to get them out of this situation.

Lately, I have seen an explosion of sub-prime auto loans where struggling families are tricked into signing contracts for high interest car loans – loans that lenders know the families cannot afford.  When the family misses a payment, the auto loan companies repossess the car.

And here is the really terrible part.  After the repossession, these same auto loan companies sue the family for the rest of the loan!

This scam works because these unscrupulous sub-prime auto loan companies trick people with poor credit into taking out loans that have hidden high interest.  A recent report by the Los Angeles Times outlined how used car dealers scam individuals by issuing sub-prime loans, knowing that their customers would default, wait for them to default, and then repossess the car and re-sell it, repeating this process over and over again.  A recent Reuters report detailed the usual routine of a sub-prime loan; a borrower with a poor credit rating is approved for a loan, often carrying an exorbitant and hidden interest rate hovering around 20 percent. This process results in customers with an average credit score of 556 and average annual income of $38,393, according to the pitch book.  These borrowers pay an average interest rate of 21.4 percent a year.

The Reuters news article told the story of a car buyer who agreed to finance a $10,000 2007 Suzuki at 21.5% interest using a shotgun (valued at $700) as his down payment. The buyer, stretched thin by various debts, including the car loan, ended up declaring bankruptcy.

Even major auto dealers are getting into the act.  While both Chrysler and GM use Ally Financial for their prime loans (which are issued to qualified buyers), GM has its own separate sub-prime arm, known as GM Financial.  In Q1 of 2012, some 93 percent of GM Financial’s loans were to sub-prime buyers, up from 87 percent in Q4 of 2010.  During that same period, loans to the least qualified buyers – those with FICO scores under 540, were up 79 percent.  GM Financial’s delinquent loans also rose by some $200 million in 2012, to $933 million – higher than Ford, Toyota and Honda’s combined delinquencies.