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]
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Reader Comments (Page 1 of 3)
Sam Abuelsamid 12:39PM (8/15/2007)
I think that this might be a side-effect of the domestic industries struggles. As the US carmakers have tried to maintain market share they have issued a lot more sub-prime loans, just like the housing industry. A lot of people who wouldn't otherwise be able to afford new cars have gotten them at very high interest rates. The imports have not had to resort to these tactics.
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The Other Bob 10:59AM (8/15/2007)
I think you are right. When Mitsubishi was struggling it gave out loans to anyone and had similar issues.
Bob
Greg A. 11:21AM (8/15/2007)
That might be the case if the study looked at loans made by any of the automakers' finance arms. HOWEVER, according to the Wired article, "The book studied some 7,000 loans from A SINGLE BANK [emphasis mine] made from 1998 through 2003." Since this bank's auto loan customers bought vehicles of different makes, clearly it is not one of the automakers' finance arms.
That said, one of the commenters on the Wired article (http://blog.wired.com/cars/2007/08/study-claims-th.html#comment-79367186) points out that the study's methodology is seriously flawed.
TBlueMax 1:43PM (8/15/2007)
Before everyone begins trying to explain the findings, please read: http://www.smeal.psu.edu/news/releases/aug07/ambrose.html
Some other findings in the research include:
• Loans for European and Japanese cars had a lower default rate (2.9 percent) than loans for American cars (4.7 percent).
• Loans for Saturns had default hazards 22 times higher than the default hazard of Toyotas.
• Loans for Mazdas were six times more likely to default than loans for Toyotas.
• Purchasers of American cars were older (45 years versus 41 and 38 for purchasers of European and Japanese cars, respectively).
• Purchasers of American cars borrowed more relative to the purchase price (80 percent versus 65 percent and 76 percent for purchasers of European and Japanese cars, respectively).
• European car purchasers had higher monthly incomes on average ($4,625) than either American ($4,024) or Japanese ($4,114) car purchasers.
Greg A. 1:53PM (8/15/2007)
Sam, your comment used to be the first comment on this Autoblog item and now it's buried on page two of the comments. Why was it moved to a much less prominent position?
Greg A. 1:57PM (8/15/2007)
TBlueMax: As I keep pointing out, a commenter on the Wired blog entry pointed out that the study's methodology was seriously flawed. Why bother posting any of the study's finding's here?
TBlueMax 5:21PM (8/15/2007)
Greg A.: I work at a research-focused university and am familiar with research methodology. Although I agree that there are potential errors in sampling and possibly in the interpretation of the data - the findings are just that... findings. Assuming they didn't screw up the data collection and depending on the type of flaw in the methodology, it may simply mean that the results can not be generalized to the greater population from which the sample is drawn. A flaw in methodology does not always invalidate the findings, as the findings are just that... findings. In sum, it is an interesting read (if taken at face value and with a grain of salt) just for the sake of looking at a slice [6,996 auto loans from January 1998 to March 2003] of car-buying Americana and some of their demographics and should not be generalized to represent all US car buyers.
Greg A. 8:35PM (8/15/2007)
"it may simply mean that the results can not be generalized to the greater population from which the sample is drawn... In sum, it... should not be generalized to represent all US car buyers."
You should've said so in your original comment. As for the study's findings having value for being "interesting," I say that value is far outweighed by the negative, improper conclusions that casual readers are taking away with them.
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.