Where The Credit Still Flows
Judging by the volume of ads I’m seeing for CashPoint during the Ravens-Dolphins game, at least one segment of the credit market hasn’t entirely shut down. Indeed, they’re quite eager to lend you money. The way it works is that you go to one of their offices with your car, your car title, and a spare set of car-keys. You need to own the car free and clear. Then they appraise the car, and offer you a loan with no credit check for some total amount of principle that’s less than half the car’s appraised value, and a high interest rate but not quite so high as a payday loan.
Thus, as a lender, you’ve hit upon a risk-free way to make money. In the worst-case scenario, your customer pays back the loan with interest in a timely manner and you make a little money. Alternatively, maybe the customer just never makes a payment and you’ve basically bought a used car for 50 percent off. Or they could make regular interest payments and offer you a steady stream of income. Or they could make payments for a while, and then default letting you repo the car. All in all, a pretty nifty business model. And if you pretend not to know anything about actual human behavior, you could even see all these innovative ways to get into debt as a good thing!
21 Responses to “Where The Credit Still Flows”
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January 4th, 2009 at 3:00 pm
or your customer sells the car to a chop shop and you get nothing.
January 4th, 2009 at 3:16 pm
Haven’t seen that ad in my market. It could be regional. Are you in a market that’s particularly hard hit by foreclosures/layoffs?
January 4th, 2009 at 3:20 pm
Or your customer totals the car and you get nothing.
January 4th, 2009 at 3:20 pm
That would be this CashPoint, right?
http://www.dc.bbb.org/report.html?national=Y&compid=165327344
January 4th, 2009 at 3:27 pm
Repossessing cars from people who know what they are doing is actually pretty hard, I’m told, at least in some Northeastern states. People have gotten free car use out of this in the last few years on no money down loans.
January 4th, 2009 at 3:59 pm
Are you suggesting they should be banned?
Payday and pink slip loan companies make convenient targets, but in general I’m very hesitant to propose laws that are basically protecting people from themselves. These loans aren’t complicated or misleading “teaser rate” loans, the risk involved is very well understood by both sides.
Now, I would like to see some serious regulation regarding what these companies can do in case of loan default, certain types of harassment should definitely be illegal, but I really don’t see why we should make the loans themselves illegal. Does everyone disagree?
January 4th, 2009 at 4:47 pm
I agree with the others who have suggested scenarios that are definitely worse for the lender than Matt’s “worst case scenario.”
I’d imagine a big chunk of the profits gets eaten up with the expenses of repossessing and re-selling the cars, and writing off cars that cannot be successfully repossessed for one reason or another.
January 4th, 2009 at 5:48 pm
Pawned!
This is essentially pawning your car, but it doesn’t go into the back room. You actually get to keep driving it.
Pawns are doing pretty well right now. The psychology of the pawn business is odd for people of means. I would never use a pawn shop as my primary financial institution, but lots of people who work at the bottom of the economic heap do. Emphasis on work because these people do work. Long ago it was explained to me that most people like their stuff and redeem their pawned items even when it is not cost effective. Yeah, some people will scam the business, but it will be a small percentage of customers.
This scheme will work in areas that are friendly to pawn shop level interests rates.
January 4th, 2009 at 6:00 pm
Title loans are illegal in NC but legal in SC. The title loan places just over the state line are, coincidentally, right next to the dealerships and used car places.
January 4th, 2009 at 7:58 pm
This could be fine with appropriate competition, that will reduce the interest rate and increase the loan.
January 4th, 2009 at 8:19 pm
According to this December 2008 news report (http://fredericksburg.com/News/FLS/2008/122008/12142008/430155)
the interest rate for Virginia-based car title loan companies is 25-30% per month, far worse than most payday loan outfits. Nice racket.
January 5th, 2009 at 10:25 am
It underscores the change in the financial industry – it’s not that they don’t have the cash, they just need to heavily reduce the risk in their portfolios. They simply can’t afford the level of risk that we were accostomed to before the financial crisis.
January 5th, 2009 at 10:50 am
The existence of a risk-free way to earn high interest in a fairly unregulated market would seem to present libertarian crackpots with a serious ideological problem.
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