John Oliver Says Sub-Prime Auto Loans Are Eerily Reminiscent of the Housing Crisis

John Oliver
Auto lenders routinely trick lower-income Americans into paying far more for a car than it is actually worth. YouTube

John Oliver is at his best when he is exposing industries that take advantage of lower-income Americans. He's broken down the dangers of payday loans, gone inside the ruthless world of debt buying and warned us about trusting self-serving financial advisers. On Sunday's edition of Last Week Tonight, Oliver took on auto lenders, specifically those pushing sub-prime loans on consumers with poor credit.

Most Americans need a car, but not all can afford one. This is where auto loans come in. They can be fine, but in recent years the market for risky sub-prime loans has skyrocketed. In November, the number of such loans reached a 10-year high, and they now make up a quarter of all car loans. There are a few reasons why sub-prime loans are bad news. For one, they carry an average interest rate of 19 percent. Lenders target consumers with bad credit, lots of debt and even those who have just declared for bankruptcy. One in three of these loans default, and the average default time is only seven months after the loan was taken out. Once a loan defaults, lenders can repossess the car, keep your down payment and may even charge you more if they deem the car's value has decreased.

This means consumers often end up paying far more for their cars than they are actually worth. To illustrate this, Oliver played clips from a local news story about a woman who told a dealer she couldn't spend more than $3,000 on a car. The dealer reassured her this would be fine. She ended up borrowing more than $8,600 at nearly 25 percent interest over three years. If she paid off the loan, she would have spent more than $13,000 on a car worth only a few grand. This is not an anomaly: It is becoming routine, and it's exactly what the lenders want to happen. As Oliver puts it, the sub-prime auto loan industry is just "one of the ways in which when you are poor, everything can be more expensive."

The consumer isn't the only one being abused by lenders. When cars are repossessed, they are immediately resold. Because cars are repossessed so frequently, often within months of when the loan is given, the same car can wind up changing hands over and over again in a relatively short window of time. Oliver points out a 2011 Los Angeles Times investigation into the journey of a single 2003 Kia, which was owned by eight different drivers in only three years, "each time at a price double or even triple its Blue Book value." That mean a lot of loans, a lot of defaulting and a lot of screwed-over families. 

If seeing all these sub-prime loans getting passed out like candy reminds you of the housing crisis, you're not alone. Oliver highlights several news clips expressing similar concerns. In fact, just as with the housing crisis, these loans are being bundled and sold off to Wall Street. Auto loans are a far less substantial part of the economy than housing, but a bubble is a bubble. As competition has intensified, lenders have only grown more aggressive, which, as far as the integrity of a bubble goes, usually isn't a good thing. If we're not careful, it's likely to pop, as bubbles under stress tend to do.