Advertisement

Auto Repossession Firms Busy as More Buyers Fail to Make Payments

Share
From Associated Press

Repo man Kevin McGivern says business is brisker than usual at his Chicago auto repossession company--one of the nation’s largest--with about twice as many people surrendering their cars because they can’t make payments.

The repossession rate is even more frenetic at Bruce Schneider’s Allied Recovery Inc. in Portland, Ore., where nearly five times as many car owners are voluntarily handing over their keys compared to last year.

“What’s going on right now is no different than at any time when money has tightened up a little,” McGivern said. “It’s all cyclical.”

Advertisement

Easy credit, including longer loan terms, dating from a time when interest rates were lower, has spawned an increase in defaulted auto loans, say auto makers, repo agents and some banks.

It’s been somewhat of a boon to the repo business, which thrives by working for creditors to seize goods bought on borrowed money when loans aren’t repaid on time.

“People were attracted to the lower (interest) rates and ran out and bought on impulse,” said Huey Mayronne, executive director of American Recovery Assn., trade group for the nation’s auto repossessors.

“At the same time they were buying TVs and other things on credit,” Mayronne said. “They didn’t realize what their budgets could handle. It’s catching up with them now.”

Trend Noticed

Domestic auto makers, which offered low-rate loans in 1986 and 1987 to help regain their share of the market from foreign competitors, have especially noticed this trend.

No. 1 General Motors Corp., for instance, reports that 2% of the vehicles financed through its lending arm, or about 143,000 cars and trucks, were repossessed last year, up from 1.6% in 1987 and the highest level in 8 years. The rate peaked at 2.9% in 1970 but had remained below the 2% level until 1988.

Advertisement

Ford Motor Co.’s repossessions and loan defaults also climbed in 1988 from the previous year, according to its financing unit, Ford Motor Credit Co. Although the company doesn’t provide figures, it noted that 1988 profits fell 17% over the previous year partly because of credit losses.

Banks have also been involved in the auto financing frenzy, introducing 60-month loans about 4 years ago in reaction to rapidly rising auto prices. But even though they’ve seen a slight rise in credit losses it hasn’t been nearly as much as experienced by the auto makers themselves.

The overall repossession rate of banks that lend directly to buyers averaged 0.1% of outstanding loans in 1988, up slightly from 0.10% the previous year, according to the American Bankers Assn.

Delinquency rates on direct bank loans averaged 1.83% in 1988, up from 1.71% the previous year, the bank trade group said.

Competition Great

“The competition is so great among the loan institutions that they’re taking fringe buyers where they wouldn’t take them,” said repo man Myles Weiss, owner of Able Auto Adjusters in Los Angeles. “The bottom line is someone will take a chance on you.”

Ford Motor Credit Chairman William Odom conceded that credit standards had been lowered, particularly among first-time buyers, but he said the company has been tightening procedures. He said the unexpectedly high credit loss of 1988 “is changing things . . . in the way we evaluate and investigate loan applications at the lower end of the credit-worthiness scale.”

Advertisement

With the steady increase in interest rates lately, some industry experts are predicting that financial institutions will be more selective in who they lend money to and that many more would-be car owners will remain on the sidelines.

But for now lenders must deal with the problems of the recent past.

“Generally speaking the adjusters have been busier than they have been before,” Weiss said.

He declined to provide any figures at his repossession firm, but some others who did noted an increase, particularly among owners who voluntarily relinquish their cars.

Schneider’s Oregon repo company used to have one or two people surrender their cars every week but now he’s seeing that same amount each day. “You’re finding more ’86 and ‘87s being surrendered,” he said.

More Give-Ups

Chicago repo man McGivern has 10 to 16 voluntary give-ups a week, twice as many as usual.

“They (lenders) put out a (large) amount of paper on car loans in the last year and a half,” McGivern said. “(But) they would not finance these cars if they did not know they had the alternative to repossess the car.”

In many cases, defaults occur in the later stages of long-term loans, when debt-burdened owners realize their vehicles are worth less than the amount outstanding on the loan, a condition known in the industry as being “upside down.”

Advertisement

“Not realizing what could happen to his credit rating . . . the car owner thinks, ‘Maybe I would be better off defaulting,’ ” said Donald W. Grigley, senior vice president at Connecticut National Bank in Hartford, Conn.

Over a 2-year period the value of a new car may depreciate anywhere from 35% to 60%, a rate which experts say has been creeping up in the last 3 to 5 years. The longer the loan the more time it takes to build up equity.

Grigley gives the following example: a new subcompact costing $10,000 in 1987 would have a book value of $4,100 today. If the owner took out a $9,000 bank loan over 48 months at 9% interest, he would still owe $4,902.18, or around $800 more than the car’s value.

The owner wouldn’t gain equity until the 30th month, when the car would be worth $3,800, versus $3,750 left on the loan. Full equity is achieved after 4 years, when the car is worth $2,800 and the loan is retired.

“The longer you go (in loan period) the more problems you can have,” Weiss said. “A 36-month loan should really be the maximum.”

After a car is repossessed, voluntarily or not, it usually is sold at auction, often “as is.”

Advertisement

But repossession won’t put an end to previous owners’ credit problems. They still remain liable for the difference between the amount of the loan and what the car sells for.

Advertisement