By Marianne Jennings
Yes! Much to the surprise of millions of Americans who have poor credit and resulting subprime auto loans, creditors can just keep collecting even after your car is gone.
Under UCC Article 9, creditors have the right to demand payment, repossess the car without a civil suit, sell the car without court approval, and then demand payment if the sale does not bring enough to satisfy the debt. That amount still due and owing, known as a deficiency remains available to the creditor. The creditor can bring a suit, win a judgment, and then obtain a garnishment for wages, bank accounts, and/or property to collect the amount due on the debt along with interest, the costs of collection, and costs of the suit.
In most lending situations, the sale of the car is enough to satisfy the debt. Indeed, the if the debtor has repaid 60% or more of the total purchase price of the car (not 60% of the amount of the loan, and that 60% of the purchase price is always a lower bar). For example, suppose you purchased a used car for $10,000. The cost of the financing for your car was a loan at 6% over six years for a total of $1932.48 in interest over the life of the loan or $11,932.48 for the total cost of financing and the car to you. Once you have paid $6,000 in principal, the creditor must sell the car upon repossession. It is not 60% of $11,932.48, but 60% of $10,000. The idea of this required sale is that once you have paid that much of the car off, the sale should bring enough to satisfy the remaining $4,000 in principal due on the loan. However, if the car does not bring enough at the sale, you still owe the principal, plus interests, and costs. And the interest keeps running until you get the amount due following the sale paid.
The situations in which the sale does not bring enough to satisfy the debt are generally with used car loans, something subprime auto lenders do as a specialty. In addition, the interest rates and penalties on subprime loans are significantly higher, so paying off that deficiency stretches into years. And the debtor is paying without have a car for transportation. Jessica Silver-Greenberg and Michael Corkery, “The Used Car Was Repossessed, But the Lender Is Still .... For example, the article gave this example:
Debtor bought a 1997 Mitsuibishi
The car was repossessed in 2007
The creditor has garnished $4,133 from the debtor
The debtor has paid an additional $2,743
The debtor still owes about $6,500 on the car
Subprime interest rates on autos average about 24%. Subprime and deep subprime loans are about 25% of the auto loan market. That debt has been securitized into a $20-billion market. Although national figures are not available for the number of lawsuits subprime lenders have filed for collection of post-repossession deficiencies, Credit Acceptance, a subprime lender, has filed 17,000 lawsuits against debtors since 2010 in just the New York state courts. Credit Acceptance has a return on equity of 31.1% (per its annual report for 2016). About 70% of Credit Acceptances loans are performing loans, i.e., not in default.
The total amount of auto lending in the United States is $1.1 trillion. Big market, high-performing lenders with many loans, and loans that bring in continuing income, even after repossession.
Explain rights of repossession and collection.
What do you think will happen with this industry as a result of the press coverage?
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