Growing car loan debt crisis demonstrates the urgency of expanding peer-to-peer car sharing

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High-interest, subprime loan. Predatory Lending.  Usury. Whatever you choose to call it, fleecing consumers through unscrupulous lending has a long and sordid history.

In recent years, it’s taken on a new form, aimed at those financing the purchase of a vehicle.

For example, imagine a consumer – perhaps a single mother – who needs a new car to commute to and from work.  Being responsible for two children, she does not have much in the way of savings. To afford a newer car, she needs to trade-in her old car, and finance the rest through an auto loan. 

But there are some problems.

She still owes money on the vehicle she is trading in.  In fact, the balance of the loan on that car exceeds the value of the car by thousands of dollars.  In addition, she also had some financial problems several years ago as a result of some pricey medical bills that insurance didn’t cover. Her credit rating took a hit.  As a result, the only financing available is from a “subprime” lender whose loan products carry high interest and hefty fees.

The consumer in our example will walk off the dealer’s lot with a loan that includes (1) the unpaid balance of the traded-in vehicle; (2) the retail price of the new vehicle; (3) all taxes, fees, and other charges. All of this will be financed with a high-interest, high-fee subprime loan the balance of which is significantly higher than the market value of the newly purchased car.

The Wall Street Journal, in a recent article, observed that:

 Borrowers are responsible for paying their remaining debt even after they get rid of the vehicle tied to it. When subsequently buying another car, they can roll this old debt into a new loan. The lender that originates the new loan typically pays off the old lender, and the consumer then owes the balance from both cars to the new lender.

The statistics show that:

  • In 2019, 33% of people trading in cars in order to purchase a newer vehicle were underwater

  • By comparison, in 2014, 28% were, while in 2009, the number was 19%

  • Today, on average, people who are underwater owe $5,000 more than the vehicle is worth, while in 2014, the average was $4,000.

  • In short, many more people are in much more debt.

In the face of growing personal debt, policymakers must focus on ways to empower Americans to generate more income in an entrepreneurial, yet realistic manner.  Peer-to-peer car sharing offers an attractive way to do just that. By sharing a car a few days per month, hosts can cover, or at least offset, the cost of these loans. 

Sean Vinck