Driven to Predatory Loans

A car can be a powerful tool, especially for low-income people in communities with inadequate public transit, which is many. Lack of transportation can be a barrier to seeking work, to getting adequate nutrition, to reaching a doctor’s office. And yet, reliable, safe cars are out of reach of many because of their high cost. Even a ‘cheap’ junker can cost $2,000, which may be more than many low-income buyers can afford, especially if they also want to keep their vehicles registered and insured to comply with the law and assure themselves of coverage in the event of an accident.

The Los Angeles Times ran a three-part series on exploitative ‘buy here, pay here’ dealerships earlier in the fall, discussing the vicious cycle, the role of investors, and the limited options available to people who want to buy cars and don’t have many choices when it comes to auto financing. The series attracted a great deal of attention in a way that other predatory lending reports have not, possibly because there’s more interest in the subject as a result of the flailing economy, but there’s something deeper going on there as well. It’s about more than just exploitative lending, but the specific involvement of these practices in car sales.

Cars are a sort of icon in the United States in a way that is sometimes hard to articulate for people from other places. There is very much a car culture here, particularly outside of major cities. If you grow up in rural or suburban regions of the US, there’s a strong chance you’re going to be longing for a license at 16[1. Or whenever your state grants them.] and hoping for a car. Not just because you need a car for transportation, but because it’s part of the culture around you. The car is a symbol. Having a car means you have access to something. Freedom, sure, but something else less tangible and hard to grab on to. As a car owner who doesn’t drive very much, just knowing that the car is there is reassuring because I’m steeped in that car culture and the expectations that come with it.

So predatory lending specifically focused on cars strikes at the heart of an iconic tradition in the US. Middle class owners may have a tough time conceiving of a world without a car, let alone the idea that some people can’t afford cars or are forced into hazardous financial transactions to access a car. The idea that a car can be a lifeline, too, may be alien to some car owners who haven’t been without a car for more than a day or two. Security, perhaps, is the thing that cars represent to so many of us, the knowledge that all is not lost, even though people may not be aware of the security until it’s gone. Buy here, pay here dealerships take that all away.

The shadowy world of alternative financial services runs deep, and generates huge profits. It’s a system that constantly generates a larger customer base because of the way it preys on people. It starts with someone who has a limited credit history and can’t access a traditional loan, perhaps, who takes out a high interest payday loan to get by. Then comes the default, turning to another alternative lender, and another, until the only lenders who will offer money are those who operate in this world, the same place occupied by buy here, pay here dealerships. The world where turnover is high and vicious and lenders prey on lack of knowledge when it comes to topics like interest and rights as a borrower.

Similar practices were seen in the home loan industry, which isn’t an alternative financial service provider at all. Borrowers were encouraged to lie, fudge their numbers, and cheat their way into home loans by unscrupulous brokers, real estate agents, and loan officers. This was particularly acute for people who qualified for insurance through programs like the VA home ownership assistance program; the people, in other words, who are likely to be low income and who may not be very financially literate. After preying on them, banks waited for them to default, often after an abrupt interest rate hike, so they could seize their homes and start the practice all over again, just like buy here, pay here dealerships.

There’s a perception that car dealerships are sleazy and banks are not that feeds into the disparity in the coverage of similar stories, why it is that exploitative car loans attract outrage and similarly structured home loans aren’t deemed as offensive. Because people expect this of car dealerships and it vindicates their beliefs, while bankers are considered upstanding types who wouldn’t engage in this kind of questionable behaviour. Bankers, thus, got off largely unnoticed for exploiting their base population, while auto lenders are not.

What people fail to understand here is that people are driven to predatory loans in a system that very specifically steers them that way, and this problem is rife throughout the financial industry. It doesn’t stop with homes or cars or personal loans. It’s everywhere, because it’s an immensely profitable endeavor. Lenders have no reason to stop doing it because they’re making huge amounts of money for their investors. When you’re processing scores of predatory loans, high default rates aren’t a problem because there’s so much money coming in. And when the government is handing you money and praising you for engaging in practices that drove the economy to its knees, that sounds an awful lot like an invitation to keep doing what you were doing. After all, you’ll get bailed out again if you run into trouble.

Unlike the borrowers trapped in your loan products.