Subpar credit leads to car repos

As the nation’s economy reels, vehicle repossessions are predicted to reach the highest level in a decade.

Thomas Webb, chief economist for a unit of Atlanta-based Manheim, which auctions cars to dealers worldwide, said auto lenders have a high number of defaults because, as home mortgage companies did, they made loans to borrowers with subpar credit.

“Banks can be pretty aggressive in their lending, and then they will pull back and correct,” he said. “Some is driven by chronic economic conditions.”

National data from Manheim show a 10 percent increase in vehicle repossessions from 2006 to 2007, and Mr. Webb predicts another 10 percent rise from 2007 to 2008.

Manheim gets much of its business from repossessions, about 1.5 million in 2007, he said.

“At this point it seems pretty logical that repos will go down in 2009,” he said. “All the lenders started tightening back in September last year.”

Representatives of local repossession companies declined comment for this story.

Dwight Payne, vice president of collections at the Tennessee Valley Federal Credit Union, also said there has been a spike in defaults. He couldn’t put a number on the problem, but he said the credit union probably has fewer defaults than larger lenders and some banks.

Mr. Payne said there are some practical steps borrowers can take to head off a repossession.

He said lenders would much prefer borrowers just to pay on time, but if they get behind in their payments, he said repossession is a last option because it’s so expensive to the lender.

“When borrowers find themselves unable to maintain scheduled payments, they should consider promptly establishing a two-way communication (with their lender) sooner rather than later,” Mr. Payne said.

He said getting in touch with the lender early on, after missing just one payment, maximizes what the lender can do for borrowers.

“Whenever borrowers reveal their difficulty and explicitly ask for assistance, lenders may offer suggestions borrowers never knew existed,” Mr. Payne said.

He said that typically lenders will suggest borrowers sell their current vehicle for something cheaper or refinance and consolidate debt to set up a smaller payment.

Mr. Webb said borrowers often don’t realize that once their vehicle is repossessed, companies such as his place it for auction.

Repossessed vehicles garner a price even lower than wholesale price, he said. If a borrower owns $20,000 on a vehicle but it sells for only $15,000 at auction, the borrower still is liable for the $5,000 difference, he said.