GM announced today that it is buying Americredit Inc, which makes loans to consumers with credit scores below 620.
GM, majority owned by taxpayers, is buying a company that makes car loans to shoppers with poor credit. Unlike home loans, though, the risk in subprime auto lending is relatively low and may reward GM. The company hopes to boost sales by making loans and leases to buyers that it must now turn away for lack of financing.
Essentially, GM is using bailout dollars to buy this company. This is moral hazard in action. It isn’t GM’s money so if this deal blows up, who cares. It just seems to me that maybe someone who can’t get financing to buy a car shouldn’t get a new car. Maybe they should be buying Fred G. Sanford’s truck (insert funky music here) and driving a clunker until they can actually afford a new or higher cost pre-owned car. The article points out that these loans aren’t as risky as a credit card because it is secured by the auto. If a borrower defaults, they just repossess the car. Ok, then what? Who do they sell the car to then?
Zero percent financing and subprime car loans helped push GM over the edge in 2008. Clearly, we haven’t learned our lesson. It just makes me want to say, “You big dummy!”