44

There's a rather old joke which is being told in many variations and my question would be whether events narrated could actually happen in real life. I'm not in the US so I don't know all the details of how banks work in the US.

The joke goes something like this:

A person enters a bank in a large city (typically New York) and asks if he can get a rather small loan (perhaps one thousand USD). The bank clerk asks for a collateral and the person offers his expensive car (worth some hundred thousands USD). Every bank employee thinks the person is insane (or dumb in some joke variations) offering such an expensive collateral for such a small loan yet the person insists this deal is okay with him. So he signs all the paperwork, drives his expensive car into the bank's garage, gets the loan and leaves. A month later he gets back, repays the loan, pays some small amount of interest (perhaps one hundred USD), gets his car back and drives away. Turns out he just wanted to have his car parked in some safe place and with this trick he had his expensive car parked and safe for a whole month and the cost was very cheap for him.

(end of joke)

Would this work in the real life?

  • 9
    Anything is possible. It all depends on the deal you can make with the bank's loan officer. – Ben Miller May 10 '17 at 15:50
  • 3
    According to this it is highly unlikely: snopes.com/parking-vijay-mallya-joke – Michael May 10 '17 at 15:50
  • 5
    @Joe The "Skeptics" question would be "Did this happen?" (which is what Snopes answered "no".) Here, the question is, "Would a bank make this loan?" – Ben Miller May 10 '17 at 16:15
  • 8
    No this won't work in Manhattan as banks do not have parking spots. It is possible to work in Brooklyn where there are parking spots, but the bank is more likely to issue a lien on the car instead of securing the car. (I'm unsure if it's possible to issue liens against portable property.) – Chloe May 11 '17 at 2:16
  • 3
    In some inner-city parking structures, the fee for losing your ticket stub, while punitive, is less than say 4 days of all-day parking. So a "similar" trick (obtain parking while on holiday for a nominal amount) does exist. – Coxy May 11 '17 at 5:20
80

I've never heard of a bank taking possession of collateral at loan issuing, they just obtain a legal right to use the collateral to satisfy the debt in case of default.

Pawnshops/pawnbrokers on the other hand do take collateral up front, and there are auto pawnbrokers, I doubt it would be economical, but you could certainly pawn your car for 30 days and have it be stored safely.

  • 40
    +1. There are title loans made all the time. The bank doesn't need to store the car; they would just put a lien on the title. I would imagine that in a place like NYC the bank would charge you extra if you asked them to store your car. – Ben Miller May 10 '17 at 15:58
  • 7
    @BenMiller Yeah, in CO title loans are illegal, so pawnbrokers here take possession of the vehicle to back the loan. – Hart CO May 10 '17 at 16:00
  • As others have said, the problem is the banks don't take possession (and assume the risk of holding) collateral. They just put a lien on the title. but since it is a "money" question, does the math work if they did? Say a $1k loan for one month at 4% APR. That's $40 in simple interest, for a year, or a bit under $4 a month. Clearly cheaper than parking. So the money math works, but the premise doesn't. Insurers want to get paid a risk premium for taking on others' risk. – JesseM May 10 '17 at 20:29
  • Direct link to cheese bank (until CNN moves it): cnn.com/2013/08/15/business/parmesan-cheese-bank-mpe – Joshua May 10 '17 at 21:46
  • 1
    @HartCOet al: ~30 states have outlawed title loans. CA, KS, LA, SC allow it via loopholes. States That Allow Car Title Loans. "Unless restricted, the typical interest rate is 250% to 400%. Online lenders have quoted rates as high as 651% for car title loans. FL caps APRs at 30%. Whereas credit-card usury laws are 34.99%. Even if an auto-title borrower defaults on such a loan halfway through, it was still profitable for the lender, assuming recovery. "Auto-title loans are the new subprime CC." – smci May 12 '17 at 4:39
31

The joke has several flaws.

  1. The bank would likely not accept a $100,000 car as collateral on a $1,000 loan. If the bank ever needed to collect on the debt, that would get messy fast. A bank can't take more then what it's owed plus fees and interest. They would have to hunt you down for the other $89,000.

  2. The bank would not need collateral for such a small loan. At least not like that. a $1,000 loan (or other small amount) falls in the category of a "personal loan" and either they would secure it with cash from your bank account, or trust you because of your credit rating. They may issue a credit card, or all kinds of other products to get you your $1,000 in credit, but not an auto loan.

  3. The bank would not "take" your car for the length of the loan. In fact they won't want anything to do with it. They wouldn't want the risk. If they needed to collect they would just go pickup the car. If you have an auto loan, you have to add the bank to the title, so they already have some rights to the car.

  4. Pawnshops, which are like old school banks and despite a bad rep can be quite awesome would also not be interested. To much risk for too little reward. The interest they would make on $1,000 would be to small to have to insure a $100,000 purchase.

  • 6
    Good point about the risk - the bank (or pawnbroker) wouldn't be willing to take the chance that some catastrophe befalls your $100,000 car while it's in their possession and now they're on the hook for more than the entire loan, let alone the interest they stand to make. – Dan Henderson May 10 '17 at 20:11
  • 2
    (1) isn't really a problem—banks do it all the time for home equity lines of credit. Or mortgages for that matter. Presumably, they'd sell the car off and mail you a check for the remainder—and if you failed to update your address with the bank (or otherwise ignored them), eventually they'd turn the remainder over to your state's unclaimed property office. – derobert May 10 '17 at 23:28
  • 3
    Points 1, 2 and 4 don't really help too much. The question could easily be changed to a $20k loan and a $20k car. Even with a loan as high as 10% interest per year, you are still only paying $5 a day in 'parking', well below market rates in any Australian city. – Scott May 11 '17 at 5:31
  • 2
    Most of these are completely wrong and read like you have no experience of consumer finance. There is not necessarily an obligation for a bank to chase you down to return $89,000. (If you come back they might have to pay you though.) Banks make small loans secured against valuable real estate all the time. A pawnbroker would be quite happy to make a small loan on valuable collateral (although they might encourage you to borrow more). They would add the insurance to the cost of the loan of course. – jwg May 11 '17 at 14:01
  • 1
    @jwg: The higher the pawn amount, the less reason a customer would have to redeem the item. A pawn broker will earn the most when the pawn amount is either the maximum that won't cause default, or the minimum that will. – supercat May 11 '17 at 22:08
6

As Hart CO mentioned, it seems like it would be possible to pawn a car for 30 days to have it stored safely. This may not be a wise idea, though. Remember, the reason you have to hand over collateral is so that the lender can take ownership of the collateral in the event that you default on your loan. Since this is a wealthy person with a fancy car, we can assume that he'll have the money to pay off the loan when he gets back, but that assumes things don't go wrong in the mean time.

One can imagine plenty of things that could cause someone to default on their loan despite having the money to pay it back. Suppose you sustain a serious injury toward the end of your month-long trip and are rendered unconscious. By the time you wake up in the hospital two weeks later, your car has been sold and all you're left with is the measly $1000 you borrowed and a red mark on your credit score. Maybe your flight will be canceled and you'll be stranded somewhere without phone or internet access to tell someone to go pay your loan off.

Of course, you have to balance the likelihood of something like this happening vs. the likelihood of your car being stolen or damaged if you park it somewhere less secure or the cost of paying a higher price for a real parking spot. Still, if I had a $100,000 car I wouldn't sign anything that put me in a situation where one unlucky event could result in my car being owned by someone else.

  • 3
    In USA, is the pawn shop allowed to keep the full value of the collateral? In my country they would have to sell the car in an auction, take $1000 plus their costs, and give you the rest. – user39263 May 11 '17 at 11:52
  • 1
    I guess, but by this logic you should also never use street parking, since you could park your car, leave, and be struck by a car at your ultimate destination. Then you would end up in a coma and your car would be towed, impounded, and eventually repossessed by the city police. Outlandish? I don't think that much more than your scenario. – Casey May 11 '17 at 13:35
  • 2
    @Casey The whole premise behind the joke is that the person doesn't want to do street parking. – Daniel May 11 '17 at 14:11
  • 1
    @Daniel I'm not really sure what that has to do with anything. I'm just pointing out that you can have bad outcomes regardless of what you do if you're considering the case where you end up spending weeks at a time unconscious. – Casey May 11 '17 at 17:47
5

It wouldn't work, because if the bank had a space for storing cars used as collateral, they wouldn't be blind to the fact that it's a form of parking, for which they would charge the market parking rate to the loan account.

Banks charge for every darn thing they can, and regard any concession as a rebate.

So, that is to say, the bank might have a procedure in place, for sufficiently highly valued loans collaterized by cars, to reverse the parking charges. The parking fee might still appear on the account, but immediately followed by a reversed charge, just to make it clear that there is a parking fee that the bank is covering with a rebate.

In my own personal bank account, I see a service charge every month which is immediately reversed with its negative equivalent; that's to remind me that the product isn't free; I'm just getting a break as a "long-time, valued customer".

Actually the fellow in the joke isn't as clever as he thinks he is. The situation of extremely cheap parking is in fact a case of arbitrage. What he should be doing is advertizing that, as a joint venture with a major bank, he has a great deal for providing a low-priced parking spot for a month for a luxury vehicle in the bank's secured lot. Then effectively borrow someone else's vehicle, get the loan with that vehicle as collaterial, charge the owner the advertized rate for parking (still a bit lower than market), and pocket the difference. Needless to say, the clever arbitrager also doesn't engage in anything so financially reckless as actually owning a luxury vehicle.

  • 5
    This answer is overall good. But the "Needless to say, the clever arbitrager also doesn't engage in anything so financially reckless as actually owning a luxury vehicle." seems unrelated, and not particularly true... Even a shrewd arbitrager is a living person and can just as easily enjoy exotic cars as anyone else... And in fact there is nothing wrong with buying an expensive luxury vehicle if you accept it is not an investment and is simply something you want and enjoy... (What is the point in the end in making money if there is nothing one wants?). I would +1 if this didn't include that. – Vality May 11 '17 at 22:58

protected by Community Mar 27 at 22:02

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