Lenders Can Now Disable Your Car When You're Driving on the Freeway | Alternet

People with poor credit are being sold cars with GPS-based kill switches.

 

Photo Credit: Andrey Popov/Shutterstock

November 7, 2014  |  

 

 

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Imagine this scenario: You’re on an important trip miles from home and stopped in traffic, but before you can continue on your way, your car shuts down. You’ve got enough gas in the tank and no mechanical problems. But you’re stranded far from home because you’re a few days late on your car payment and the lender won’t let you drive until the debt is paid.

If this sounds like part of a dystopian future in which repo men are now cyborgs, it’s not. It’s happening today and becoming a big part of the new automotive landscape. Car dealers and automotive lenders are targeting those with poor credit by installing GPS-based kill switches, or starter-interrupt devices, on the cars that they sell.

The New York Times recently reported that about 2 million cars are now outfitted with such kill switches in the U.S., which is about one-quarter of subprime car loans, and creditors are not shy when it comes to remotely disabling cars whose owners are behind on their payments:

"Some borrowers say their cars were disabled when they were only a few days behind on their payments, leaving them stranded in dangerous neighborhoods. Others said their cars were shut down while idling at stoplights. Some described how they could not take their children to school or to doctor’s appointments. One woman in Nevada said her car was shut down while she was driving on the freeway.

"Beyond the ability to disable a vehicle, the devices have tracking capabilities that allow lenders and others to know the movements of borrowers, a major concern for privacy advocates. And the warnings the devices emit — beeps that become more persistent as the due date for the loan payment approaches — are seen by some borrowers as more degrading than helpful."

Subprime automotive-loan borrowers, those with FICO credit scores below 660, debt-to-income ratios of more than 50% or a bankruptcy in the past 60 months, are a growing segment of automotive borrowers. This phenomenon has been buoyed by auto dealers trying to continue a strong sales rebound after years of weak sales and by securities investors who buy bonds backed by those loans and see them as a way to get ample returns when other interest rates remain low.

In a healthy economy, buying subprime securities can be a lucrative way to exploit those who are still struggling with debt, but still may be able to find work and earn a decent wage. But when the economy goes soft, so do the subprime markets, as lenders become wary of taking on large credit risks. As the economy weakened in 2007, and the subprime mortgage securities market became unstable, it resulted in the U.S. credit crisis which, in turn, fueled the deep recession between 2007 and 2009.

But in this lukewarm recovery, investors are bullish on at least one subprime loan market. While foreclosed homes have proven nearly impossible to resell during hard times, used cars still sell relatively well even during a deep recession, providing ample collateral for these subprime loans.

Still, investors are skittish because they’re aware that car loans are not as well vetted as mortgage loans. The success of the auto dealer model is to let buyers come in, pick out a car, and complete the financing in one day.

Burned by subprime securities in the past and worried that car-loan applicants are not as thoroughly scrutinized as home buyers, investors need to be assured they’re not throwing good money after bad, and that’s where starter-interrupt systems (sometimes euphemistically called payment assurance devices) come in. They force borrowers either to pay the debt in full or face having the car sit idle for weeks or even months until it is eventually repossessed and resold. The theory is that when making a car payment is as essential as putting gas in the car, people will be more likely to make their payments.

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