Monday, September 24, 2012

Reverse Carloan

KPC blogger and U of OK Professor of Economics Kevin "Angus" Grier is in my neck of the woods for the nonce and he was kind enough to join me for lunch, during which he directed my attention to something I've not heard of before: reverse car loans. These work sort of like reverse home mortgages, except they use the equity you have in your car rather than the equity you have in your home. From what I've gathered in a quick Internet search, they seem to be aimed at people who don't qualify for payday lending.

There's a lot going on here. The first immediate comparison is with the payday loans: a reverse auto loan is secured, meaning that if the borrower defaults, the lender can obtain a lien on the automobile. This suggests that interest rates can be (comparatively) lower. However, you can easily see how folks might make claims of exploitation: it's bad enough that poor folks have a hard time making ends meet and now these predatory lenders will take your car if you don't make payments.

How do they stack up against reverse home mortgages? From time to time, I've heard grumbling about reverse mortgages, about how they get retirees to "destroy" all the value they've put into their homes over the years and how these lending practices exploit the elderly. I'm not sure I understand the arguments fully, perhaps the elderly are somehow considered feeble by default, therefore prone to coercion by trickery? I think folks would have a hard time making a BATNA disparity argument, since if someone outright owns their home, it's fair to say they're reasonably wealthy. The same isn't necessarily true for these reverse auto loans. For these, we've got people so credit constrained that they can't even get a payday loan. That sounds to me like fertile grounds for claims of BATNA disparity.  Aggravating the problem is the nature of the collateral: to get a job, most folks need a car. If you're out of work and you just put your Civic in hock to pay this month's phone bill, you're up the creek if the repo man comes to collect.

And does it matter what the borrower spends the money on? Carlos is diligently applying for a job as a taco truck driver and he puts the equity in his Acura towards a legitimate job search, whereas Becky uses her loan to buy a new puppy and a bag of kibble. If things go poorly for either one, Carlos has the moral advantage of thrift. Becky might be what economists call a "hyperbolic discounter", which is a fancy way of saying that she's not quite so good at planning and foresight. Paternalistic instincts might have us look at Becky and say, "she ought to know better, so let's just not let her have the option of taking this loan." Unfortunately, even assuming it's the role of the state to protect people against the consequences of their own decisions, distinguishing between the Carloses and the Beckys of the world is likely to be prohibitively expensive (note that a low-cost way of self-identification is to just have a guaranteed basic minimum income).

So, are reverse auto loans euvoluntary? If not, is it so by regret aversion or BATNA disparity (or both)? Something else? As lenders continue to find ways to extend credit to poor folks, does the increased scope of the low end of the loanable funds market present a problem for a destination euvoluntaryist? How about for a directional euvoluntaryist? What actually is the likely alternative for not having access to this sort of credit? Does its relative novelty have bearing on the attractiveness of alternatives? If so, is novelty an important part of the BATNA calculus?

I think I'll post a little more on this latter question in a future post. I suspect it might be important.


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Do you have suggestions on where we could find more examples of this phenomenon?