War On The Poor: Sub-Prime Auto Lenders
The mortgage industry has been embroiled in scandal ever since the foreclosure rate for sub-prime lenders began to reach historic levels earlier this year. Financially vulnerable consumers, who were told just a few years earlier that they could afford a home in the form of "special" financing, were promised a piece of the American dream. That dream soon proved to be a nightmare as poor homeowners could not keep up with rising interest rates and the resultant higher monthly mortgage payments. Soon, thousands of homeowners found themselves forced to relinquish their properties as the companies holding these mortgages reflexively laid off personnel and wrote off their losses. Not to be left out, the automotive financing industry -- conspicuously ignoring the mistakes of their mortgage lending peers -- is targeting sub-prime borrowers as never before. However, these lenders now have a handy tool in their arsenal to force borrowers to pay: many vehicles are equipped with an under-the-dashboard unit designed to disable the car if a loan payment is past due. Thanks to a $250 device[1] owned by an international asset protection company, motorists are being forced to pay up or risk being stranded.
On Time, Or Else
With three days left before a payment is due, a warning light highlighting the number 3 flashes on the Sekurus On Time device. Each day closer to the payment due date another light flashes until the number 1 button light ups and the unit beeps. This final warning, one of three sent, signals to the motorist that they have less than 24 hours to make their payment before their car is disabled.[2]
Sekurus Purchases Payment Protection Systems
Sekurus' involvement with the payment device came to the company by means of a merger. In September 2006, the company announced[3] that they had merged with Payment Protection Systems, the company who originally developed the disabling device. Today, Sekurus claims to have sold the device to more than 1500 dealerships with installation completed in over 250,000 vehicles. Sekurus reports that its On Time device has been credited with lowering delinquency rates from 27% to 3%, making the unit very attractive to sub-prime automotive lenders.
Lending To The Poor
Used car dealers have always marketed their vehicles to the poor as these types of dealers have often been the only ones willing to strike a deal. Of course, low creditworthy consumers would pay exorbitant interest for the privilege of purchasing a used car, at rates as high as 25%.[4] Today, some new car dealers are also finding low income buyers to be a potential market. In the past, most lenders would have stayed away from the $75 billion sub-prime market[5], but with the Sekurus On Time device available, a whole new consumer market has opened up.
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How ON TIME® Works
The ON TIME system is a legal electronic payment protection unit that uses microprocessor-based technology to turn credit-challenged prospects into paying customers who pay in a timely manner. ON TIME will remind the vehicle operator when payments are due, and it will disable the vehicle if payments are not made.
The Key Pad system (right) visually reminds customers of their payment status.
An LED will flash green to confirm when payments are current. When a payment is due, the flashing LED will turn yellow, and the customer will be aware that a payment must be made.
*3 days before the vehicle is disabled, the number 3 on the key pad will flash, reminding the customer that he/she is on their final 3 days.
*2 days before the vehicle is disabled, the number 2 on the key pad will flash, reminding the customer that he/she is on their final 2 days.
*1 day before the vehicle is disabled, the number 1 on the key pad will flash and the device will beep. This reminds the customer that they are on their last day; within a 24 hour period, the vehicle will not start.
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High-tech gear disables car if borrower misses payment
By Chris Woodyard, USA TODAY
MURRIETA, Calif.
When the light starts to flash, you had better have the cash.
That's the reality for millions of subprime borrowers whose used car purchase is contingent upon having an unusual option: a little box mounted underneath the dashboard that forces them to make their payments on time.
A light on the plastic box flashes when a payment is due. If the payment isn't made and the resulting code punched in to reset the box, the vehicle won't start. The next step is a visit from the repo man.
As tighter credit crunches consumers, it seems business can only get better for Sekurus, a company based in this suburb east of Los Angeles. It's among several companies that market such devices.
"We're just starting to see that," says Sekurus CEO Mike Simon, as the potential market of an estimated 7 million subprime auto borrowers continues to swell.
The device helps stave off default, a growing problem. Car and truck repos this year are predicted to hit the highest level in at least a decade, according to Manheim, a wholesale auto-auction service.
As more dealers look for ways to protect themselves, Simon says privately held Sekurus has grown at a 30% clip in recent years. Revenue goal this year: $20 million.
A forerunner company to Sekurus was founded in 1995 to sell anti-theft devices for cars based on radio-frequency identification, or RFID, technology. But within a couple of years, lenders had another idea: Could engineers come up with a device to force car buyers to pay up on time?
Sekurus was founded in 1999 and started selling On Time, as the device is called. It has sold 250,000 at up to $250 each. Most are bought by finance companies or dealers who cater to the most troubled car buyers, those who need basic transportation yet have checkered credit histories.
The box's LED light starts blinking when a payment is nearly due. On deadline day, the unit not only blinks, but beeps. Motorists find it so annoying that it drives "them absolutely nuts," Simon says.
When the customer makes the payment, the lender gives them a six-digit code to enter into the box.
The device lowers default rates for subprime auto loan borrowers that typically run about 30% to about 5%, according to Simon. When default rates fall, lenders feel more secure offering financing for more valuable cars to high-risk customers. By forcing buyers to pay on time, the device also rebuilds their credit record.
Car dealers say most customers aren't thrilled to punch in a code with every payment but grow accustomed to the device.
"We've used it as a tool to keep the repo rates down," says Jeff Hamilton, partner in the family-owned Hamilton Classic Cars in Chester, Va. "We don't have to go after them as much." Most of his customers are required to make payments twice a month, and often wait until the last day, "when it starts beeping at them."
Cedric Brown, a loan specialist at Star Loan Acceptance Center in Clifton Heights, Pa., says he's had a great response. "We are able to help a lot of people who otherwise might not be able to get a vehicle," he says. A few customers, he adds, even grow to like the discipline it enforces.
Car dealers have a choice when it comes to such payment devices.
One Sekurus rival is Pay Technologies in Cleveland, which sells mostly wireless systems. Dealers can access accounts through the Internet and send a message to the device in the car as with a paging system. Again, the car is shut down if payments are not made.
"It's a huge improvement," says President Jim Krueger. He says Pay Technologies started a decade ago with a keypad system "and I can't tell you how many calls we got on the weekends" from customers who lost codes or tried to enter the wrong one.
Another competitor is PassTime USA in Littleton, Colo., which uses a mix of keypad and wireless systems. President Frank Jacobsen says he thinks the credit crunch will "make a difference" in sales, along with payments from the federal economic stimulus package that could boost car buying.
Sekurus is continuing to introduce products. The latest enhancement is coupling the keypad to a global positioning device. Not only will the car's starter automatically shut off, but a message will go to the loan holder with its location to make repossession easier.
Simon says he hopes the new system will give lenders added assurance, allowing more high-risk borrowers to buy better cars.
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