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Where do those auto loans go?

January 3rd, 2008 at 06:49 am

I was listening to Dave Ramsey the past few days.

The first caller I remember was a guy engaged. He had a 30k car and his wife to be had a 30k car. They were making 60k between them. The guy also just got out of bankruptcy. He also had a couch from Rent-A-Center.

I was thinking to myself “WOW, what the heck.” Could you imagine being the loan officer at the car dealership? “Let’s see. You make between 30k – 40k? And you just got out of bankruptcy? How about fully financing that purchase?”

So, who pays the price of this high risk loan? The dealership? The car company?

Neither, you and me take the risk on these people. See, Wall Street bundles up all these loans from GMAC, Nissan, BMW, credit cards, etc. and sells them to mutual funds (similar to mortgages). So the auto company sells their receivables to Wall Street then they offer securities based on these loans. These are called Asset Backed Securities.

Anything with a payment stream (auto loans, credit card payments, bank loans, boat loans, etc.) can be securitized.

No wonder store credit and loans are so easy to get. The stores don’t have to hold on to them sell the best ones to Wall Street and then the really bad ones to collection agencies. No need to wait for your money.

Where does this leave us as a society? The sad thing is that this isn’t a unique story.

4 Responses to “Where do those auto loans go?”

  1. Broken Arrow Says:

    Yes, the sad part is that it's not unique at all. In fact, I don't think it's even in the minority. Sometimes, I think the world has gone insane.

  2. EnglishTeacher Says:

    This is a major reason that the financial sector is tanking right now. Home loans, auto loans, etc,, both good ones and bad ones, have all been bundled up into those asset backed securities. So many of them are faltering that it is hurting everyone.

  3. scfr Says:

    I know, I know ... I think Susan Powter is kind of obnoxious, but these days I just want to do what she did grab my face and scream out loud: STOP THE INSANITY!

  4. ralph Says:

    Yes, we sure do pay! Hillary Clinton, someone with a very good chance of getting in the White House, wants to bail out subprime mortgages with 30 billion of our money.

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