The alternative to 26% interest is that people with bad credit wouldn’t be able to buy cars at all.
The lender has to be able to make a profit or they won’t make loans. The costs of repossession are high. The likelihood that a sub-prime auto borrower will default is also high.
Say you buy a car with a $10,000 loan and a 26% interest rate for an 5 year loan. The monthly loan payment amount is actually only $299.40. You default after one year, so the car is repossessed.
After 1 year, you would have paid $2472.71 in interest and $1120.09 in principle.
So the lender has received a total of $3,592.80 on the $10,000 loan they made.
Now they have repossession costs. Let’s say that’s $500 for someone to pick up and tow the car. Now the lender has to have someone auction the car. That’s going to cost them about $300 in expenses plus at least a 10% commission to the auctioneer. You bought the car at retail, but auctions don’t fetch retail prices. Plus the car is a year older. Let’s say it sells for $5,000 so the commission is $500.
The lender paid $10,000 for you to purchase the car. They received a total of $8,592.80 between the payments on the loan and the auction sale price. They pay $1,300 in recovery and sale expenses.
So the net result is that the lender receives $7,292.80 from the payments and auction sale price, but loses $2,707.20.
The only way the lender can come out profitable is to have a pool of risky borrowers where some of them will pay the entire thing at a high interest rate to offset the loans where they lose a substantial amount of money.
The $1,000 payment in the story includes insurance, which obviously isn’t paid towards the loan. We have no idea what the man in the story’s actual monthly payment on the car was.
Wikipedia tells me that:
The creation of the 'automotive city' detailed by Norton in Fighting Traffic, primarily involved the reconfiguration of American city transport infrastructure and services, from the early 1920s to the 1960s, around the growth of modes of private transportation (the automobile).
So American society designing cities around car ownership took place during the period of 53 to 100 years ago.
Nobody woke up one day and said “hey let’s design cities based around cars so we can screw people with bad credit by charging them 26% interest on car loans.”