What Happens When the Auto-Loan Boom Blows Up

Wolf Street

One theory of the bulls – who don’t see a recession in the future – is that the slow recovery since 2008 means that there are few imbalances in the big sectors of the US economy whose busts could cause recessions. The idea is that they haven’t been inflated to risky levels.

That is not correct. Here we look at one: automobile sales. They’ve been booming, and loans associated with them have been soaring:

US-light-vehicle-sales=2006_2015-11

To achieve this, lenders have taken car loans and leases beyond any sensible level of prudence, as documented by data from Experian’s Q3 State Of The Automotive Finance Market and the Fed’s quarterly Consumer Credit report.

  • Record high average amount financed for new cars: $27,000, 50% of median household income ($54,000).
  • A record 87% of new car purchases are financed.
  • Of those financed, 27% are leases, with short maturities (average 27 months) to people with strong credit, but not building any equity.
  • Car loans with record long loan maturities: 44% with maturities of 61-72 months, 28% of 73+ months.
  • Record high loan-to-value ratios (LTV) for new and used vehicles, exceeding the value of the vehicles by a large margin. Even regulators are warning about it.
  • With long loan maturities and high LTV’s, these cars have negative equity for many years, and owners will have difficulties trading out of them to buy the next car.
  • 11% of new car loans are to people with subprime credit (scores of 600 or below).

This is how auto loan balances outstanding have ballooned from record to record, hitting $1.03 trillion at the end of the third quarter:

US-autoloans-2015-3Q

So far, delinquency rates remain stable: 5.2% of outstanding loans are 30+ days past due as of Q3, down year-over-year. After all, loan defaults resultfrom economic downturns, not lead them.

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