Young people vulnerable to subprime car loans

June 26 2008 by Ellen Roseman

A new car costs almost as much as what a home cost 30 years ago. So, affordability is an issue for many Canadians, especially those buying a first vehicle.

Car dealers love to advertise low rates or zero per cent financing, but that assumes you have good credit. What if you have dodgy credit? What if you’re young or a newcomer to Canada and you have no credit history to speak of?

I’ve been trying to help AF, a 20-year-old who ran into big problems with a Toronto car dealer. Despite the intervention of the Ontario Motor Vehicle Industry Council (OMVIC) and Leasebusters, she’s stuck with a vehicle that’s financed at a high 20 per cent interest rate.

She admits she trusted the salesperson and signed contract papers she didn’t understand. (Why don’t young people consult lawyers — or even their parents — before doing such things?) Her only option is to sue. But she’s not sure if she can keep making the payments until her day in small claims court comes up.

Her case is not unusual, according to a recent article in the National Post. It’s a win-win situation for the financing companies:

The pair who got the loan — one with no credit history and the other with a bad credit rating– only qualified for a subprime loan at 18.5%. If all went well, the financing company, Wells Fargo, was set to earn more than $16,000 in interest over six years.

If things unravelled — as they often do in the rapidly growing subprime car loan business — Wells Fargo would be fine. The company would repossess the car, resell it and send a final invoice to the customer for the difference.

Sounds to me as if the U.S. subprime mortgage lending pattern is alive and well in Canada — among car dealers. And as the National Post points out, the Big Five banks have been buying up the second-chance car lending institutions.

See the comments below that describe AF’s dilemma and what others I consulted said about it. If you have any advice for her, you’re welcome to add your opinion.

9 comments

  1. Lior

    Jun 27 2008

    Dear Ellen,

    I’m glad that you decided to cover this topic because I know plenty of people who get trapped exactly the same way as AF. The problem with people like that is that, too often, they seek advice AFTER they made the deal and not before. And once you sign off on the papers, it complicates the situation a great deal in terms of undoing the damage.

    I work with a car wholesaler part time and in this line of work, in addition to going to dealer auctions where many repossessed vehicles go and get sold, I get to chat with many different people working in the industry, be it salespersons, service managers, leasing managers, etc.

    Without any doubt, the subprime financing business is a bonanza for both dealerships and the financing companies. I’ve heard many stories similar to AF’s, except that the stories this time were told by salespeople and managers who were bragging about what they get away with.

    For them, it’s just another day in the office. Salespersons work purely on commission and salaried managers get bonuses. The more people they sign, the more money they make. A simple formula.

    But quite often, many will not divulge everything to the customer even if it’s required by law. And the customer quite often won’t bother researching anything before signing.

    Remember that after the deal is done, that customer is no longer the dealership’s responsibility. Once the vehicle is delivered, those who were involved in the sale make their money and move on. It’s the buyer who’s left to sort out the ensuing mess if they were not careful. And that leads me to the next point.

    It’s important to emphasize that the only reason why this sector in general has got so out of control is because of the buyer’s stupidity. Indeed, some of you may disagree with me about calling people who take one of those “everyone gets financed” deals at 18% stupid. They’re effectively buying a car with a wholesale value of say $10,000 and for 60 months paying almost three times what the car is actually worth when purchased — and that’s not taking into consideration additional depreciation in price over those 5 years that the vehicle was financed.

    But of course as we’ve read in the article, many people who sign off on such high interest deals never actually make it to the 4 or 5 year mark. Many will just not be able to afford the payments from early through the term, and we know where things go from here.

    Here’s some simple advice I can give people. Save as much as you can for a car. If you have good credit and you’re in the market for a new car, insist on a very low interest rate or no interest rate at all. After all, you’ve earned it and the market is highly competitive.

    If they don’t give you what you expect or anything reasonably close, make sure to tell them you’ll be taking your business elsewhere. If you don’t have a good credit rating, save as much as you can and borrow as little as you can.

    Also, try reducing your expectations a little bit. If you wish to buy a car, go for something that’s 5 years old, instead of a brand new or one to two year old car. You’ll save a fair bit of money.

    Perhaps most importantly, read every line on the contract and never sign off if you are unsure about anything. NEVER let any salesperson or manager pressure you into accepting a deal you’re not sure about. If you find yourself being pressured, walk away.

    In addition (and this is important for people who returning lessees and don’t really like to take care of the car they were driving), if the dealership offers you any incentives to take another lease from them, make sure you get it in writing. What do I mean by that? Well, say you’ve leased a car for the past four years and you haven’t exactly taken care of it as you should. When the lease ends and you decide to return the vehicle, the dealership will obligate you to pay for certain repairs if maintenance was neglected during the term of the lease.

    If they tell you, “we’ll be willing to look the other way on any repair costs if you lease another car from us”, make sure you actually get this in writing. I know someone who got sucked into a deal like that and now they’re stuck with a terrible deal on the new lease. And despite being told they will not be liable for any repair costs, they were indeed held liable.

    Of course, the customer couldn’t really do anything about it except scream at the salesperson who didn’t give a damn and call the car maker who too didn’t give a damn because they have nothing in writing — and on your lease agreement it states that you’re responsible for any damages that occur out of neglect. Food for thought from real life situations.

    If you have decent credit, try talking to your bank and getting a loan from them after you’ve been presented a financing deal from the dealer. If you have a long relationship with your bank, work with them to see if they can give you better financing terms for the car.

    Essentially what I’m saying is never take the first offer.

  2. Potato

    Jun 28 2008

    I’m not a lawyer, but AFAIK, yes, you have to keep up the payments even if you’re suing — if you sue and lose, then you’d have to make up those payments plus penalties.

    It’s too late for AF, but car buyers should remember that it’s one of the larger purchases they will make in life — shop around! Get a lawyer, an organization like the APA, or an experienced friend to help you look over the paperwork or with the negotiations.

  3. Mike

    Feb 11 2013

    WHEN IN SUBPRIME BANKING, TAKE THE SMALLEST PAYMENT ON THE SMALLEST VEHICLE AND ASK WHAT THE CASH PRICE IS BEFORE YOU AGREE TO THE MONTHLY PAYMENT. IF THE MONTHLY PAYMENT EXCEEDS THE ADVERTISED PRICE, DON’T BUY IT, PERIOD.