Loose lending practices to riskier borrowers make it likely the next debt crisis will be a car-loan crash
For years now, the U.S. auto market has been booming as manufacturers, dealerships and consumers have benefitted from record-low borrowing costs, spurring ravenous demand for passenger cars and trucks in the post-Great Recession recovery. But recent market signals, including softer new-car sales, more discounts and idling car factories, indicate buyers are starting to tap the brakes to their purchases following six consecutive years of growth.
But the term “sales” obscures one of the basic facts of car buying. Most new and used cars purchases are financed. In fact, auto loans account for $1.1 trillion of America’s household debt. Borrowers piled on $32 billion in auto-loan debt in the second quarter of 2016 alone compared with the previous year. Automotive debt outpaced all other forms of debt in the second quarter, according to the latest data from the Federal Reserve Bank of St. Louis.
About 8 percent more auto loans were dished out in the three months ending June 30 than in the same period during the previous year. At the current pace, auto-loan debt could soon surpass student loans as the second most common form of household debt, according to data trends tracked by the Federal Reserve Bank of New York.
Meanwhile, concern is growing over the tens of millions of Americans driving around in cars that are “underwater” — that is, worth less than the outstanding balances on their financing plans. This, coupled with increased signals that risky subprime borrowers are struggling to make their monthly car payments, is putting a spotlight on the loose lending practices that resemble the way many buyers were hoodwinked a decade ago into home mortgages that they couldn’t afford.
“People are increasingly missing payments within the first six months of taking out their auto loans, which is a telltale sign that loans are being made that are clearly unaffordable,” Chris Kukla, senior vice president of the nonpartisan Center for Responsible Lending, told Salon.
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Author: Digital Dealer
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