16 August 2007
A chapter in the forthcoming Household Credit Usage: Personal Debt and Mortgages suggests that buyers of American cars are more likely to default on auto loans than are import buyers.
Loans secured for European cars and Japanese cars are 50 percent and 56 percent, respectively, less likely to default than loans on American cars.
The authors looked at the performance of 6,996 auto loans from January 1998 to March 2003. In addition to the probability of default being higher for American cars, their results show that loans on European cars are the least likely to be prepaid, followed by loans for Japanese makes.
The authors suggest that, just as insurance companies base rates on the make and model of the car being insured, banks should consider dropping their "house rates" for auto loans and adjust interest rates according the type of car being financed.
That scream you heard is Bob Nardelli trying to move 100 days' worth of Jeep Commanders.
For the life of me, I can't imagine why there would be such a difference between domestic and import buyers, though the research offers some hints:
The second of these points seems the most salient, since not only is there greater loan exposure, but the domestics tend to depreciate faster. Still, the default rate isn't extraordinarily high: 4.7 percent for the domestics, say the authors. Perhaps a factor is the remarkably high level of incentives Detroit offers to move the iron off the dealers' lots, which might encourage people to buy costlier vehicles than they can actually afford. But this isn't entirely a domestic phenomenon, either: Mitsubishi took a half-billion-dollar bath on an attempt to build market share by aggressively courting subprime borrowers.
So this is interesting, I suppose, but I await further data. In the meantime, if anyone's interested, the last time I bought a car (June '06) I put down 44 percent of the purchase price. It was, however, a Japanese car.Posted at 2:45 PM to Common Cents , Driver's Seat