BW: Car Loans
08-20-07, 04:58 PM
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BW: Car Loans
By David Kiley
Buyers of Saturn vehicles beware. If the authors of a new study have their way, banks may one day charge you a higher interest rate on your car loans. Among the findings in the researchers' sample of almost 7,000 loans from a single bank: Although not the worst delinquents, Saturn buyers are 22 times more likely to default on their loans than Toyota (TM ) buyers are. In fact, owners of American cars generally are more likely to default than owners of European or Japanese cars.
The research, in a forthcoming book, Household Credit Usage, published by Palgrave Macmillan, shows that default probability isn't only a function of credit history. Brent Ambrose, lead author of the book and the study, says loans secured for European cars are 50% less likely to go into default than loans for American cars. And owners of Japanese cars are 56% less likely to stop paying.
The study looked at auto loans made from January, 1998, to March, 2003--a period when Detroit cranked up its 0% financing deals and offered six- and seven-year paydowns. Foreign automakers and their dealers did far less of this type of lending, which attracts borrowers with poor credit.
Ambrose, a professor at Penn State's Smeal College of Business, argues that loans for American cars "should have significantly higher interest rates to compensate for higher default risk." And to balance the higher risk, carmakers, he says, should raise prices.
That would mean that buyers paying cash would be subsidizing borrowers with poor credit. And the last thing Detroit needs is for its best customers to have to pay a premium to buy American.
Buyers of Saturn vehicles beware. If the authors of a new study have their way, banks may one day charge you a higher interest rate on your car loans. Among the findings in the researchers' sample of almost 7,000 loans from a single bank: Although not the worst delinquents, Saturn buyers are 22 times more likely to default on their loans than Toyota (TM ) buyers are. In fact, owners of American cars generally are more likely to default than owners of European or Japanese cars.
The research, in a forthcoming book, Household Credit Usage, published by Palgrave Macmillan, shows that default probability isn't only a function of credit history. Brent Ambrose, lead author of the book and the study, says loans secured for European cars are 50% less likely to go into default than loans for American cars. And owners of Japanese cars are 56% less likely to stop paying.
The study looked at auto loans made from January, 1998, to March, 2003--a period when Detroit cranked up its 0% financing deals and offered six- and seven-year paydowns. Foreign automakers and their dealers did far less of this type of lending, which attracts borrowers with poor credit.
Ambrose, a professor at Penn State's Smeal College of Business, argues that loans for American cars "should have significantly higher interest rates to compensate for higher default risk." And to balance the higher risk, carmakers, he says, should raise prices.
That would mean that buyers paying cash would be subsidizing borrowers with poor credit. And the last thing Detroit needs is for its best customers to have to pay a premium to buy American.
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