Many economists are predicting that auto loans could set Americans up for another financial crash. New cars cost an average of $35,000. That is a considerable uptick from the average several years ago – $31,000. Given that 86 percent of all Americans use a car to get to work, something wicked this way might be coming.
Why are cars suddenly so expensive?
In 2008, the US economy collapsed, fueled by mortgage backed securities. These were the infamous “subprime” mortgages, in which people with low credit were allowed to purchase homes. The layman might wonder why mortgages given to people who can’t afford it would be so calamitous to the general economy.
Well let’s consider how many jobs are required in buying a house: loan officer, realtor, appraiser, inspector, title agent, closing agent, underwriter, broker, realtor assistant, surveyor, photographers, digital makers, cleaning crews, stagers, et cetera. That’s not even an exhaustive list. When people are buying homes they can’t afford, the economy can’t afford to lose the jobs required to buy homes.
And now something similar is happening to the auto industry.
Since the first quarter of 2016, consumer delinquencies in general have risen in every category, from direct auto, to mobile home, to bank cards, to non-card revolving loans. A manager at Advantage Credit Counseling added:
“We’ve run into consumers in class with upside-down car loans, where the value of the car is worth less than what the car is costing them,” Ms. Murray said. “It’s often due to higher interest. These consumers are a higher credit risk. They go to places like mom-and-pop car lots that will take a higher risk customer.
“But they end up buying lower-quality cars at a higher price, and oftentimes the loan outlasts the car,” she said. “Usually, if you are in that situation where that’s the only option for a car loan, there are other credit issues to deal with.”
What’s even more alarming is that subprime auto loans share some strikingly similar numbers to the subprime mortgage lending. The housing bubble peaked at $44 billion per quarter. Meanwhile, subprime financing for auto loans peaked at $42 billion per quarter.
Interest rates at buy here, pay here lots average 19 percent. Or 29 percent (!) if you happen to live in the wrong zip code. Fast forward to 13:36 of that previous link, and HBO’s John Oliver shows sobering footage of an actual debt buyer’s conference. Predictably, they have no problem getting people to pay the cost of a car twice over in ridiculous interest rates.
This shocking and unfortunate fact has some analysts predicting that car loans could fuel the next financial crash. The aggressive lending has led to the current rise in auto loan delinquencies, prompting a sobering question – will lenders handing out loans to consumers with low FICO scores demand yet another bailout in the future?