The subprime auto loan market is surging, and electronic repossessions are also on the rise. An article in the New York Times states that electronic disabling devices have been installed in two million vehicles. Lenders can activate these devices remotely, and they will disable the vehicle so that it will not start. Once disabled, the car is stuck.
Many consumers report that their cars were disabled if they are even one day late in their payments. This can cause real problems - the NY Times article describes a woman who could not drive her young daughter to the emergency room because she was 3 days late on a car payment.
Most of these devices use GPS technology to enable the lender to easily locate the vehicle's location, even when it is being driven. While some of the devices only permit the tracking of a driver's comings and goings when there is a default, the more popular models allow car dealers and creditors to check up on a vehicle's location at any time. This raises serious concerns regarding among privacy advocates, who question whether there is any legitimate reason for creditors to have such information.
Generally, only subprime lenders who extend credit to borrowers with credit scores at or below 640 use these devices. Borrowers with better credit have other borrowing options and would not agree to such an invasion of their privacy. And, it is questionable whether the cost of the devices would justify the benefits for conventional lenders.
For subprime car loans, however, these devices can provide lenders with tremendous leverage. If a vehicle is disabled, most consumers will want to get caught up as soon as possible.
There are legal issues raised by the use of these devices. While laws in Connecticut and other states permit their use, the disabling of a vehicle is generally considered repossession under state laws. Those laws generally require that written notice be given to consumers, and frequently, those notices are not sent when a disabling device is activated. Failure to give those notices may entitle a consumer to sue for damages.
Our advice: We recommend to our clients that they avoid financing a vehicle with any subprime lender. Vehicles offered for subprime sale are often in poor condition, and they are usually overpriced. Consumers are generally better off buying an older used car from a private party. But, there are risks in those transactions as well. Our webinar on how to buy a used car provides useful information.
If you must finance your purchase, then you may have little choice except to buy from a dealership. Fortunately, while the use of these devices is on the rise, most subprime auto sales do not include the installation of the device. So, it is easy to avoid having one installed in your car. Ask early in the car-buying process whether a device will be required. Don't worry that the dealer will be afraid to sell to you if you ask the question; the dealership always wants to sell you the car! If they say they sometimes use those devices, walk away and shop somewhere else.