If you do not have perfect credit, you need to read this article.

The government is considering creating a consumer protection agency that would seek to regulate lending for car loans, home loans, credit cards, and so on.

Some of the ideas sound great, in theory. Lower interest rates on auto loans and credit cards, sure. Who wouldn’t like to have a lower car payment, right?

The thing that the White House forgets is that not everyone pays their bills. Many people have had repossessions, foreclosures, bankruptcies, charge-offs, collections, judgments, etc.  Guess what? People who have these negative items in their past are most likely to repeat previous transgressions. I am sorry to be the bearer of bad news here, but if you have really bad credit, there is a pretty good chance that you deserve fairly high interest rates.

It is the only way that the lender has a chance to turn a profit. For every loan that does perform properly, there are several that do not. Do you know how much money the average bank loses when a car loan goes to repossession? Here is a hint: Several Thousand.

There is good news: You can still get a loan!

Let’s pretend that the government capped all auto loan interest rates at 15%. How do you think lenders would be able to offset the risk associated with the sub-prime type of customers applying for auto loans?

Two Words: Down Payment.

You see, car buyers with really bad credit can usually still get a car loan if they have $2000-$3000 down under most circumstances. If the government limits the interest rates that lenders can charge, you could see that down payment amount double or even triple. If you have a repossession in your past, it is very realistic to assume that the lender could want to see 50-70% down payment to give an auto loan.

Another Option: Acquisition Fees

In some states, lenders can show acquisition fees on the contract. The consumer knows they are paying them. In other states, the auto dealer simply needs to absorb the acquisition fees into the cost of the vehicle, driving up the price you pay for the car. These acquisition fees can easily be $3500 for a car buyer with very bad credit.

Let me make something very clear. We do not condone, nor justify predatory lending. However, let’s make sure we are talking about the same thing. High interest rates and predatory lending are very different.

Predatory lending is when a lender or broker takes advantage of the intelligence of a person and gives them a loan that is not a competitively priced loan and/or is a loan that that person is obviously not going to be able to repay. Predatory lending is horrible and I have personally seen several clients who were taken advantage of during the housing bubble.

High interest rates are often required when a buyers past performance suggests that there is a very good chance that the new loan will not be repaid on time or in full. Most lenders rely on the secularization market to secure their funding. Based on the type of loans that a particular lender deals with, and the quality of the applicant, a lender’s cost of money for a high risk borrower might be 15-20% and they might be charging you 19-29%. If you do the math, you might see that they could be making as little as 4-9% on the money. That is not a lot of potential profit for a high risk auto loan.

What would happen if the government gets too heavily involved in sub-prime auto lending?

To put it bluntly: many of the lenders will simply close their doors. Most of the employees working at these lenders will need to look for work. The dealers will have far fewer options to help people get financed for a car. However, public transit revenue would increase dramatically. If these people cannot finance a vehicle, and they do not have the cash to buy a reliable vehicle outright, the only option left would be public transportation.

Some have said that the government would rather see you on the bus than have a high interest rate auto loan. Which would you prefer?