Tethers trim subprime loan losses
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June 14, 2010 01:00 AM

Tethers trim subprime loan losses

Donna Harris
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    It's an increasingly common scenario:

    The customer's credit blemishes land him a credit score below 550. The finance manager contacts a lender that agrees to fund the car sale as long as the customer lets the lender install a starter-interrupt device or global positioning system on the car.

    Or maybe the lender doesn't insist on either device -- but offers substantially better finance terms to customers who agree to installation.

    The starter interrupt warns the customer when it's time to make a payment. When customers skip paying, the car doesn't start. The GPS unit lets the lender track the car's location.

    Experts say F&I professionals will see a lot more of such devices. A study released at the National Automotive Finance Association's annual conference in Fort Worth, Texas, this month suggests financial institutions that use these systems can cut their losses when funding risky car loans.

    The savings: $300 to $400 off the typical $5,000 loss on a bad loan of about $10,000.

    Kenneth Shilson, president of Subprime Analytics, the Houston consulting firm that conducted the study, also said research shows lenders are becoming more inclined to use the devices, though in the past they might have thought the systems were too intrusive.

    Subprime Analytics studied more than 80,000 auto loans in which finance companies used the devices.

    "The starter-interrupt system definitely improves delinquency rates and reduces collection costs," Shilson said.

    The GPS unit is a psychological deterrent to slow payment or default. "People are more reluctant to walk away from the contract," Shilson said.

    And they're less likely to run away with the car without paying for it. The tracking system improves chances of recovery and repossession. The devices are embedded under the dash.

    "On a highline vehicle when there is more cash in the deal, lenders are gravitating toward using GPS," Shilson said. On a lower-value vehicle when the customer puts less money down, lenders tend to use the starter-interrupt device.

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