Big Brother is My Co-Pilot: Car Lenders Get Tough

Photo: Devices that won?t let your car start unless you pay your bills

Some high-risk borrowers now get car loans with a digital leash attached: if they don't pay up, they can't drive.

Elliot Munoz loves driving his Jeep Liberty around his hometown outside St. Louis, Mo. He particularly likes the four-wheel drive for the snow in his hilly town.

But when a red light on his dashboard starts flashing, Munoz knows he needs to get out his checkbook or else he won't be able to start the SUV.

Munoz is part of a small but growing group of drivers whose car loans come with a digital leash attached: if they fail to make timely payment, the car won't drive.

"When you get near to your payment, it starts flashing red," Munoz, a steelworker said. "You might be busy, but you get in and you see light flashing red and it catches your eye."

With the device in his car, Munoz has never missed one of his $370 monthly payments.

Homeowners who fall behind on their mortgages can't hide their homes from banks looking to foreclose. But delinquent vehicle owners can easily move their vehicle around, hiding it from the repo man.

That has led car financing companies to charge higher rates for assuming greater risk. But these devices -- which have been around for a decade but are growing now in popularity -- severely reduce the lenders' risk.

"They own the car and if people aren't paying for it, they want the car back," said Jack Nerad, market analyst for Kelley Blue Book. "Borrowers are very frequently pretty resourceful at keeping cars away from lenders, even if they haven't paid for them."

Nerad said the business is growing for two reasons: the technology is now cheaper and people want more expensive cars.

High-Risk Car Loans

It works like this: when a driver's payment is late, a little light or beep signals that it's due. If the money is paid within a day or two, the signal goes away and they keep driving for another month. But if no money is sent to the lender, another warning signal goes on and within 24 hours the car will be disabled.

The manufacturers of these devices emphasize that your car won't just stop in the middle of the road -- once the car is on, it remains on. But when you shut it down, you won't be able to restart it. (Lenders do give car owners a certain number of emergency codes that allow them to start to car for 24 hours so they won't be, say, stranded in a bad neighborhood at night.)

Supporters say customers get loans they might otherwise not get, dealers get to sell more cars and lenders get an added sense of security.

Donald S. Birger is owner and president of InstaCredit Automart, a so-called "buy here, pay here" dealership based in Collinsville, Ill. Virtually every car his dealership sells – more than 3,000 last year – his company finances in-house.

In July of 2007, the dealer started installing starter interrupt devices called "On Time" manufactured by California-based Sekurus. Birger now installs the device on every car he sells as a condition of financing.

"We found it's made our collection process a lot easier," Birger said. "The idea is to keep people in the car, not to repossess the car or stop them from driving."

Most of Birger's customers have poor credit histories and are at high risk of not repaying their loans. InstaCredit used to lose about 20 to 24 percent of the money it loaned out through missed payments or people who simply drove off with the cars never to be heard from again. With the On Time devices, Birger said, his loss rate has been cut to about 10 percent.

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