While the devices have mostly been used in the subprime auto loan market, other lenders are looking closely at the technology, manufacturers say. It's no mystery why interest in the gadgets is soaring: creditworthiness of American consumers declined during the last recession, as they lost jobs in record numbers and found it harder to tap into home equity. Financially stretched consumers have to figure out what bills they are going to pay – and what payments they have to postpone. And car dealers and lenders want to make sure it's not loan payments that fall to the bottom of the pile.
Consumers could increasingly find themselves in cars with shut-off devices if their credit turns bad and they are forced to shop at dealerships serving the subprime market. These sellers range from small mom-and-pop, "Buy Here, Finance Here" outlets to major retailers.
Industry statistics show that thousands of consumers a month can fall from "A" to "B" credit - meaning that they have recently been late with a house payment and had other credit problems. Others have fallen lower, becoming candidates for subprime car loans for the first time in their lives. Buyers usually end up paying more than they would pay for a late model used car or new car financing if their credit was good. Since the risks are higher, dealers and finance companies feel they have to hedge their bets by boosting interest rates to 27 percent or more.
The shut-off devices, which are required by a growing number of subprime loan contracts, are the product of a revolution in telematics - the blending of telecommunications and wireless technology. The devices are usually controlled remotely by the dealer or lender and are linked to the vehicle's powertrain. They usually cut out the power several days after the payment is due. Before the deadline the driver is treated to a concert of tones and flashing indicators signaling that the deadline is approaching. There are also warnings after the deadline has passed.
Their proponents call the devices a win-win for consumers and finance companies. They make it possible for dealers to sell cars to people who would have a hard time getting a loan otherwise. The buyers end up paying a somewhat lower interest rate because the risk to the lender is less.
The products also include global positioning – or GPS – to speed up the repossession of the vehicle, if necessary.
Not all the uses of the technology are related to subprime lending: PassTime said its devices also double as anti-theft measures, making it possible for the consumer to track a stolen vehicle on his own with a computer. General Motors has introduced a feature using similar technology that enables law enforcement to track a fleeing car and slow it gradually to idling speed when the situation warrants.
The devices used in the subprime market have spawned lively debates about their value and appropriateness, along with Internet chatter about how to disable them...a move sure to send the repo teams into action. There have been a few lawsuits and scattered complaints about devices shutting down the engine while the owner is driving. Manufacturers attribute the incidents to mechanical problems unrelated to the devices.
Numerous safeguards are built-in, the manufacturers say. The devices won't shut down the engine while the vehicle is moving, and consumers can extend the car's operation in an emergency. Contracts spell out that the device is present on the vehicle. "We have customers sign a disclosure before they get into the car, saying the unit is on the car and how it is going to function," the PassTime exec said. "The disclosure form is four or five pages long, and the customer checks off every box. If the dealer won't disclose the unit is on the car, then we won't do business with that dealer or his lender," he said. But the entire system may break apart if the dealer doesn't sell a good vehicle, he added. Some customers simply won't make the payments if a vehicle doesn't run reasonably well.
One device, called the On Time, is produced by Sekurus, Inc. CEO Don Lavoie said he joined the company because it was on the verge of going mainstream. He compares the concept to payment plans for cell phones - people pay on time because they don't want to see their service cut off.
The device basically leads customers to push car payments up their bill-paying hierarchy.
"Families across the country, regardless of their financial condition, move the bill to the top of the queue for payment if they need that phone for its basic utility, such as arranging to pick up the kids from soccer or school. There are 300 million active cell phone users in the United States, and those people are paying their cell phone bill on time," he said. "And the reason is they can't use the phone if they don't pay for it."
As the economy deteriorated, the shut-off devices seemed to be coming into their own. "We have several credit unions that won't finance a car without it," Lavoie says. They are financing high-quality used cars to non-prime buyers – a category that includes both subprime and some other financially-challenged segments. A typical member of this group might be described as someone with less-than-stellar credit.
The potential for the market is huge. "There are 40 million used cars sold a year, and 20 million are considered non-prime," said Lavoie. PassTime sees similar potential for its products. "Right now we are even talking to national lenders who have "A" credit customers. They would leave the device in the inactive mode unless the customer defaults."
The flexibility of the PassTime devices could accelerate their progress into the mainstream, he says. They can be reset for new payment schedules if owners run into a problem, giving them extensions of a few days at a time if the buyer can only afford to make partial payments. In the meantime, the borrower and lender could conceivably work out a new payment plan. In one more example of how cars are developing minds of their own, GM introduced its "Stolen Vehicle Slowdown," as an option on a number of models, including the Cadillac Escalade and the Chevrolet Silverado.
If the vehicle is stolen, customers call OnStar, and its staff locates the vehicle using a GPS device and then gives police the location, says James Kobus, a communications manager at the company. "If the police start closing in, and they notify us that the conditions are right, we can slow that vehicle down." A light on the instrument panel signals "Engine Power Is Reduced" and the car idles down to about three miles per hour.
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