Wednesday, September 5, 2018

Interest-Only Subprime Auto Loans are Too Good to Be True

Interest-Only Subprime Auto Loans are Too Good to Be True

Low-income families can sometimes find themselves desperate to get financing for a new-to-them used vehicle. They may be swayed by low monthly payments or interest-only subprime auto loans. But these lending options come with big strings attached, and sometimes the lenders don’t lay everything on the table.

There hasn’t been much good news for consumers coming out of the Consumer Financial Protection Bureau (CFPB) recently. Regulators haven’t been doing much in the way of new lawsuits or other regulatory action. But on August 29, 2018, the CFPB showed some life, announcing a settlement with the European auto lender Banco Santander SA for consumer protection violations related to its interest-only subprime auto loans. 

Santander Fails to Protect Consumers Against Mounting Debt

The CFPB said the Spanish bank’s affiliate, Santander Consumer USA Holdings Inc., was misleading consumers looking for low-cost auto lending options. The company allowed borrowers to make interest-only monthly payments on their subprime auto loans under the “Temporary Reduction in Payment Plan” (TRIPP) without explaining that the option would increase the total cost of the loan in the long run. The lender also sold consumers “guaranteed auto protection” (GAP) insurance without telling them the benefits would not always cover the cost of replacing the car after an accident.

Why Interest-Only Subprime Auto Loans Are a Bad Deal

Interest-only subprime auto loans can be enticing for used car buyers. They promise borrowers low monthly payments, allowing them to buy cars they wouldn’t otherwise be able to afford. But if borrowers only ever pay the interest on the loan, they will never pay it off. Until a borrower goes above the monthly interest, the principle amount still remains untouched, and will continue earning interest year after year.

And subprime loans come with a lot of interest. More than 70% of subprime borrowers pay more than 10% interest on their auto loans. That means for every $100 they borrow, they will pay an additional $10 every month in interest. In some cases where loans are initiated at the dealership, those rates can go as high as 30%. When borrows fall behind on all that interest, they can also face steep penalty interest and late fees, making it even harder to get out of debt.

Interest-Only Subprime Auto Loans Take Advantage of Low-Income Families

Part of the problem with interest-only subprime auto loans is that they target the people least able to understand these terms. Low-income families with little or poor credit history are not able to secure traditional financing through their banks, so they turn to the dealerships and third-part lenders like Santander. The “buy here, pay here” dealers push buyers to sign on for high-interest subprime auto loans, often based on the promise of low monthly payments.

Because of these borrowers’ history, they may never have learned about how credit works. Others have had problems with debt in the past. If they have not learned from their mistakes, interest-only subprime auto loans can cause these families to get into a cycle of debt they can’t afford, and can’t escape.

Santander Settlement Avoids Lawsuit with Little Promise of More Protection

The CFPB’s investigation of Santander started over a year ago. Investigator Richard Cordray had been ready to sue the bank for misleading American consumers. But instead, the CFPB chose to settle, allowing Santander to pay a fine and promise increased protections, without ongoing supervision. 

Two days later, Santander announced its chief executive, Jason Kulas, was stepping down. However, he was being replaced by Scott Powell, who was already an executive with the company. This makes it unlikely consumers will see any real change under the new leadership.

Interest-only subprime auto loans are deals that are too good to be true. Unless the CFPB and other consumer protection advocates are there to make sure borrowers know what they’re getting in for, they could be taken for a ride and charged far more than their cars are worth.

Dani K. Liblang is a consumer protection lawyer at The Liblang Law Firm, PC, in Birmingham, Michigan. She helps the victims of subprime auto loans escape harassment by debt collectors. If your used car has turned out to be a rebuilt wreck, contact The Liblang Law Firm today for a free consultation.

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