Filed under: Car Buying
Report: Owners of American cars more likely to default on loans
Findings from a recent study could potentially change the way banks pick interest rates for new car loans. The study, run by Penn State's Smeal College of Business professor Brent Ambrose, found the probability of car owners defaulting on their loans was actually affected by the make of the model.
Looking at the outcomes of 6,996 car loans between January 1998 and March 2003, researchers found that owners of European and Japanese brands were 50% and 56% respectively less likely to default on the their loans compared with owners who bought American. Basically, the eggheads are saying that loans for American brands should have higher interest rates than foreign brands to compensate for the higher default risk. Saturn was one of the worst performers in the survey, with the average owner of a Saturn 22 times as likely to default on a loan as a Toyota owner.
The research has the potential to see lenders judge loan costs by the make and model of a car, just as insurers do when calculating premiums. The news is sure to be a blow to the already struggling Detroit 3, but, we suspect any changes to lending criteria are still some way off.
[Source: Smeal College of Business via Wired]
Reader Comments (Page 1 of 3)
freckles 10:12AM (8/15/2007)
what? you gotta be kidding me! who conducts these surveys?
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F451 1:16PM (8/15/2007)
It is probably an effort on the America side as the professor deals with real estate. When people go upside-down on real estate or an automobile they have more incentive to walk. American automobiles simply do not have the resale value of other cars. And the real estate industry is one of the slimiest in American business, next to the insurance companies.
lotuspeople 2:36PM (8/15/2007)
Actually this is quite obvious and people in the business already knew this information. Most people don't realize this is one of the reasons GM-ford upped their warranty coverage. The reason a lot of American built car owners defaulted on their loans is because they did not want to pay for a dead car? It makes a lot of sense .. I wouldn't I would just let the bank repo the piece O crap.
Don 3:51PM (8/15/2007)
That might just be it, Lotus...folks unhappy with their unreliable domestic.
geo.stewart 10:17AM (8/15/2007)
I think they need to look at the demographics of the individuals buying rather than the make of the vehicle.
I would expect that the numbers creep up the lower the price point.
Saturn high? Gee, how many college students bought a Saturn? Yes, a lot buy Corollas and Civics but Toyota and Honda have the Avalon, Camry, Accord to counter.
MORONS...
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Chris 10:18AM (8/15/2007)
And these people call themselves smart? The cars aren't making the payments, the people are. These "researchers" need to go back and get another BA/BS as they failed to learn how to fully analyze an event. The person most likely to default on a loan is the person who can least likely make the payment, regardless of the type of car they are buying. It just so happens that people who can make the payments aren't buying American cars.
I'm not sure I'd keep paying on the POS after it broke down. Of course that doesn't explain why I'm still making payments on the 330i.
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ted 12:04PM (8/15/2007)
Very true Chris. Don't these researchers take into account the days when ford and Gmac approved anyone with a pulse just to move the steel?
Mr. Oak 1:10PM (8/15/2007)
Another thing, the people who are in over their heads with foreign car payments, are more likely to commit insurance fraud. This allows them to get out the cars and preserve their credit.
A couple of years back in NJ, the FBI grabbed 85 mostly white collar folks were paying some Auto detailer to make their "problem" disappear. The guy they were paying had already been busted by the FBI, and was working with them as the front for a sting operation.
The FBI was holding all of the cars in a warehouse. Owners called in by insurance companies to handle paperwork. Surprise, Surprise, they all reunited with their cars and made the acquaintance of an FBI agent.
Chris 2:00PM (8/15/2007)
Mr. Oak, the worst part about that situation is that most of the time lenders will bend over backwards to help borrowers when they fall on hard times.
Most of those people are going to pay a steep price for not wanting to take a slight hit on their credit. Sure a repo is bad on ones record, but nothing like insurance fraud.
Avinash machado 10:20AM (8/15/2007)
Another reason for import lovers to start domestic bashing I guess.
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rob 10:45AM (8/15/2007)
every single time there is an article similar to this, you always post the same thing. are you HOPING for some domestic bashing, or what?
Avinash machado 11:01AM (8/15/2007)
Actually I keep hoping that the domestic bashing will stop.
Allan 11:56AM (8/15/2007)
Then how about just not mention it and let it go away on its own. If you keep bringing it up before anyone else does, you're only lighting the fire...
Allan 10:39AM (8/15/2007)
Wow you guys expect this stuff to change the world or something. It's one study that they're sharing the results of. Of course there are 50 more options for similar studies and related studies and all sorts of other stuff to look into based on this info. It's a start... calm down.
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rob 10:47AM (8/15/2007)
regardless of what the results of this study are, i don't think it'll affect the lending industry much. just another one of those study that kinda make you go "hmm, never would've thought".
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Yggdrasilly 10:50AM (8/15/2007)
I would imagine that many people who buy domestics are independent contractors buying vans and pickup trucks, which they need to haul the tools and materials for their jobs. Their income is less steady than people with white-collar jobs. Might this explain at least some of the difference in the default rate?
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Mallory 10:51AM (8/15/2007)
They key is looking at the typical demo for each brand. Toyota caters to old people so statistically they're probably better off financially and more wise with their money than your average 20 something who is buying the Saturn, at least when it comes to purchasing a new vehicle.
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XJ 10:57AM (8/15/2007)
I wouldn't say Toyota caters to old people. Buick caters to old people. I know a whole lotta folks who bought a Toyota as their first vehicle (especially Corollas). Toyota would be stupid if they didn't cater to all age groups.
Allan 11:09AM (8/15/2007)
Actually, if you RTFA:
"Purchasers of American cars were older (45 years versus 41 and 38 for purchasers of European and Japanese cars, respectively)."
And another interesting note is the monthly income... while it might be as expected for most people, the difference from the American to Japanese buyers is actually much closer than I would have thought:
"European car purchasers had higher monthly incomes on average ($4,625) than either American ($4,024) or Japanese ($4,114) car purchasers."
CoffeeJones 10:56AM (8/15/2007)
Import vs. Domestic notwithstanding
Domestic with a dealers accepted loans for 'anyone with a pulse',
60 months! 3% financing! Bad credit? No credit! No problem!
Just take these goddamn Ions and H3s off the lot! Please!
It's sad, but that's what happens when people are on shaky ground to begin with. Why some people absolutely positively refuse to buy used is beyond me.
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