Are we facing an auto loan subprime bubble?
In part one of this blog, we discussed why America may be facing the biggest subprime bubble since the mortgage meltdown in 2008, but this time the shaky loans in question are to finance automobiles, not houses.
Will this lead to mass defaults and greater economic problems like what happened with the mortgage market? We outlined 15 facts about our auto loans and the possibility of another subprime bubble.
Here are the next 10 facts, and some tips how to avoid getting caught in the auto finance bubble:
1. Some financial analysts and economists think we are premature sounding the trumpet on a disastrous credit bubble caused by auto loan defaults, especially since losing a home is far more catastrophic than losing a car, and we’re talking about tens of thousands of dollars, nut hundreds of thousands like with mortgages.
2. Most likely, the auto credit bubble can be characterized as a big problem, but not an epidemic that will send shock waves through our economy like the mortgage meltdown did. But compound that with over a trillion dollars of student loan debt, rising credit card debt, medical debt, and stagnant wages, and an auto bubble “pop” could easily push millions of Americans into the red on their monthly budget.
3. The bigger problem with this flood of auto loans comes a few years down the line. Autos, unlike real estate, always lose value, and in fact usually drop sharply in value (40-60%) after the first couple years of ownership alone.
4. With this depreciation of huge numbers of new cars, that means consumers will essentially be trapped in these loans, as the values will be far less than what they owe. With loan terms now commonly 5, 6 or more years like we outlined, people will be stuck paying monthly payments and unable to sell or refinance.
5. And with automobiles, maintenance costs also skyrocket after a couple years, with warranties typically expiring after a certain number of years or mileage count. Even the extended warranty isn’t a great bet, as the auto companies carefully play the odds to make sure the cost benefit is in their favor.Consider that a recent Consumer Reports survey revealed that 55 percent of owners who bought the extended warranty didn’t even use it during the lifetime of the policy. For those who did use it to make needed repairs, there was a net savings of -$375.
6. Many automobile loans are also based on variable instead of fixed financing, where interest rates – and therefore payments – will rise as the prime rate or another index increases over time. With the Fed just raising rates for the first time in years – and a gradual increase of rates anticipated over the next 18 months – an increase in variable rates across the country could cost consumers and auto loan holders hundreds of millions of dollars in higher monthly payments.
7. But still, auto loan delinquencies have increased by nearly 120 percent since 2010, from just over 1 percent that year to 2.62 percent in 2014 – and continuing to rise.
8. According to the Center for Responsible Lending, of all one in every six title-loan borrowers – nearly 17% – is already facing repossession.
9. And the first signs of the bubble losing air are upon us, as sales numbers have actually started to lag toward the tail end of 2015. Amid record production of new autos and auto loans, the actual number of new cars sold is now at a 6-month lull – the lowest rate of purchases since 2013.
10. But at the same time, new auto inventory is so high that the new vehicle inventory-to-sales ratio is at its highest since 2008 (and that’s not good).
Think of it like this – how many people will still want to pay $65,000 in total payments interest and principle over 6 years on a car they bought for $45,000 that is worth $15,000 by the end of that term, along with rising maintenance costs and a HIGHER monthly payment?
Would you?
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So what are some tips for beating the auto financing bubble?
- Always do your research ahead of time via the Internet so you know fair pricing and value before you ever walk into a car dealership.
- Get approved for financing at your local credit union or bank instead of at the auto dealership.
- Keep a great credit score to ensure the best financing terms and rate. If your credit score is not 700 or higher, consider utilizing Blue Water Credit to help improve it in the months ahead of your auto purchase.
- Consider the true cost of the automobile – including the interest, loan fees, and total payoff, not just the monthly payment.
- Understand that dealers and car salesman make a good deal of their profit on serially over-priced after-factory extras, options, and extended warranties.
- Don’t let anyone rush you – take your time to find the right car at the right deal!
- And finally, consider buying a certified pre-owned car instead of a new one. Think about the fact that the typical midsize sedan depreciates more than $7,419 in its first year alone – more than it will lose in the next three years combined!
