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SubPrime Loan? If You Gotta...You Gotta;
But Be Careful +VIDEO
LEARN MORE: Subprime News Archive
Detroit-er burned on subprime Durango deal forces new awareness to dangers of 25% interest
By Maureen McDonald
Senior Editor
Michigan Bureau
The Auto Channel
Car lot owners and impoverished car buyers often come to extreme loggerheads over car purchases.
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Hale bought a 170,000 miles from a used car dealer on Livernois, once the leading strip in the region for used cars. First Class Auto, owned by Dave Siljanovski and Steve Culakovski failed to disclose that the vehicle had been in a serious car wreck and the engine was on its last leg. It gasped to extinction a month after purchase.
Hale was battling cancer and desperately need a working vehicle to get to her job and chemotherapy. With no funds for a down payment, a spotty credit history and inexperience dealing with more reputable car dealers, she bought from a Detroit business close to her home.
With few credit options, no wheels to go comparison shopping, she agreed to purchase the vehicle for $7,500 at a 23.99% interest rate. The dealer also convinced Hale to buy a $2,200 warranty to cover all major engine and transmission malfunctions. Hale quickly learned the hard way, that the extra warranty wouldn't cover a $5,600 engine rebuild.
The defendant, First Class Autos, claimed they weren't responsible for the warranty he sold her through Wynn's Plus Used Vehicle Service Contract and suggested she sue them. A clause in the contract Culakovski didn't see in the fine print, states limits of liability that would not exceed the actual cash value of the vehicle. He asserts in court filings that he didn't have sufficient knowledge of the warranty's coverage terms.
The case, according to Liblang, mirrors the crisis in America today with subprime loans and the way low-income customers are preyed upon because they have few purchase options, much less ways to pay a loan off quick.
But a growing concern on Wall Street and consumer watchdogs hopes to reduce the amount of subprime debt - hovering at $1 trillion, and help consumers with vehicle purchases.
According to Carfax, the "buy-here-pay-here" lots have a history of bilking customers, citing an extensive 2011 report done by the Los Angeles Times. If a customer comes in with little money for a down payment and a spotty credit history they could get hit up for terms up to 10 years and 30 percent interest rates.
The car lot owner, according to Liblang might double or triple the price of the vehicle to assure he will get his money back. A car worth $2,000 might sell for $4,000 or $5,000 so if the owner defaults on payments after a year, the price the dealer paid for the vehicle at auction is achieved.
If the owner needs to wrap in a down payment and a warranty in one financial package, the creditors the lot owners do business with can spread a note over six or more years.
If a customer can't meet the payments, the loan company or the lot owner could repossess, thus putting another black mark on the credit rating. With all the extra costs, Hale had a monthly payment of $400, according to Liblang.
"Higher than others would pay on a brand new BMW lease," Liblang says. "She had no money for a major repair - that was what a warranty was supposed to do. With a bad engine the car was inoperable."
The subprime situation is looming almost as ominous as the mortgage crisis in 2005. John Oliver sounded the alarm bells on his news show, noting that one in three subprime loans default and the average default time is only seven months after the loan was extended.
If repossessed, it could be purchased and repossessed several times. The Los Angeles Times investigation into the journey of a single 2003 Kia found eight drivers owned the car in just three years. Oliver says, That means a lot of loans, a lot of defaulting, and a lot of screwed-over families."
With the average new vehicle costing $34,000 and used cars $18,000, many people with marginal credit - even decent credit are forced into long-term, high interest loans. Rising delinquencies are negatively impacting the industry and disrupting the used-car market, according to car industry sources.
The Los Angeles Times found subprime loans create more difficulty for consumers because the loans are bundled and sold to investors, just as home mortgages were bundled and sold in the early and mid 2000s, leading to a major crisis of unsecured credit.
Consumers have less recourse in holding the loan company responsible for astronomic loan costs because the firm no longer owns the paper. It may have sold five or six times to larger, more distant financial companies.
Liblang holds the car lot company responsible as the primary seller and underwriter. She is suing First Class Auto in Wayne County Circuit Court for fraud and misrepresentation and hopes to recover the full cost of the SUV, estimated at $14,584 and legal fees. The defendant continues to assert it was not to blame and the case is not settled. .
Liblang hopes the federal government steps in and does more to regulate and monitor used car sales for the sake of poor families in economic distress. Without a car, Hale cannot work and thus could not make car payments.
How to avoid car fraud
Consumer Reports offers several guidelines to avoid getting burned on a car deal. Here are some suggestions from the magazine:
** Nearly every automotive magazine and website has an inspection checklist. Make sure the car performs properly.
** Check the internet for recalls before you purchase your vehicle, Used Car Buyers Guide RECALLS, or by calling the National Highway Traffic Safety Administration's (NHTSA) Vehicle Safety Hotline at 1-888-327-4236.
** Federal law doesn't require dealers to fix recalls on used cars. It may have to come out of pocket. Are you willing to spend this additional money. NHTSA says don't wait, it could affect the safety of the car, such as airbags under recall.
** Get an independent review of the car. Pay for a mechanic to look over the engine, transmission, brakes and electronic systems in the vehicle.
** Make sure you've got a clear title to this vehicle. Individual sellers might have stolen the vehicle or bought a salvage yard car that was in a flood. Looks good but conceals rust, mold and operational difficulties. The Department of Justice offers a National Motor Vehicle Title Information System. The National Insurance Crime Bureau maintains a free database on flood damaged cars and other information. "We could do much more to stop the cycle of abuse. We need more consumer protection in the sale of used cars. People can't escape the rigors of poverty without reliable transportation. Every effort must be made to conduct fair, above-board deals," Liblang said.