Lesson Learned? Not Today!

Here it comes, driving down the street. Getting the scariest looks from everyone it meets. Hey, hey it's a repo, and people say it's taking us down. But we're too busy crying, as every car is repo'ed in town. (With apologies to Mickey, Davy, Peter and Mike)

It is coming, folks. The next big bubble bursting is the new and used car market. Why? Let's just say not everyone can really qualify for car loan, no matter what the dealers say. (Like the mortgage broker or banker from the late 90s and up to 2008, there are dealers and salespeople who have integrity and won’t slam the buyer for the sake of a sale.)

Just because you have a job and a license, doesn't mean you can afford the car loan. Consider that if your credit score is under 640, technically in the new world of lending, you are "sub-prime". Now where have we heard that term before?

Oh, yeah! The housing market, uh, disaster which resulted in the wonderful economy we still enjoy, remember?

In Sunday's late online edition of the New York Times there is an interesting article of the flim-flam which exists, especially in the used car industry. People are "qualified" to buy a car by the dealer/salesperson because they may have a paystub, some money toward a down payment and a few trade lines on a credit report. 

But, then, something goes awry. The salesperson puts an income on the application, nowhere near the actual amount what the buyer truly earns, and the lender approves him for a rate nowhere near an affordable, long-term payment. Soon enough, the payments stop being made; and the nightmare begins.

One night, the tow truck pulls up and takes the car away. When the borrower wakes up, he knows what happened. The lender will sell the car for whatever it can get. The borrower will still be obligated for the difference. Generally, it will be for a huge chunk since the lender won't get nearly enough to pay down the loan. Now, he still owes on a loan and doesn’t have the car. What a deal!

This is still ongoing in the housing market. The mortgagor isn't able to make the payment, and eventually, foreclosure proceedings begin. The home is auctioned, and the amount is applied to the outstanding mortgage. The lender doesn't care about any down payment which may have originally secured the loan.

So, as we continue through this morbid economy, watch to see more cars become repossessed. It is horrible already and will only get worse.

Soon enough, student loans will suffer the same fate. If graduates default on these loans, essentially, their credit is in the tank forever. Then, no matter what, there will be no car loan, or mortgage for that matter, for them to default on. 

For now, the auto industry will cause heartache for today's borrower, much like the real estate and mortgage industries did ten years ago, by putting people into cars they have no business owning. 

No lesson from ten or fifteen years ago is learned yet. And that's the shame!