Is America facing a subprime bubble with our auto loans?

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Are we facing an auto loan subprime bubble?

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. The trends are hard to ignore:

Americans are buying more new and big cars, and financing them at record rates.

While some of that can be attributed to an improved economy, there are reasons for concern. Instead of putting money in savings or paying down student loans, credit card debt, and mortgages, Americans seem to be feeding their appetite for taking out credit on autos that make no financial sense – a shocking number by consumers with subprime – or less than average – credit scores.

Will this lead to mass defaults and greater economic problems like what happened with the mortgage market?

Here are 25 facts about our auto loans and the possibility of another subprime bubble:

1. As of the third quarter of 2015, auto lending was at an all-time high of $968 billion according to credit giant Experian, and easily expected to surpass $1 trillion by the time 2016 rolled around.

2. Through October of 2015, new car sales were up 5.8% for the year according to Autodata.

3. Once the data for 2015 is tallied and released, it’s expected that new vehicle sales will hit the 17.5 million mark – an all-time high.

4. Consider that there are approximately 320 million people in the United States, and that means more than 1 out of every 19 people in the U.S. bought a brand new car…this year!!!

5. But way too many of those new car purchases were with auto financing, as opposed to cash, trade-ins, bank loans, or money borrowed from home equity lines of credit.

6. According to Experian, 19.3% of auto loans during the third quarter of 2015 were for consumers with subprime or deep subprime credit scores. That means less than two-thirds, 61.3%, of auto loans went to people who had prime or super prime credit.

7. That’s a gradual uptick in subprime auto loans since the rate was about 18.1% in 2011. While adding a little over than 1% of subprime auto loans may not seem significant, there are other factors that contribute to the fiscal irresponsibility and concern.

8. According to the Wall Street Journal, “Over the six months through September, more than $110 billion of auto loans have been originated to borrowers with credit scores below 660, the bottom cutoff for having a credit score generally considered good,” the report reads. “Of that sum, about $70 billion went to borrowers with credit scores below 620, scored that are considered bad.”

9. Auto companies seem to be flooding the market with new vehicles – increasing vehicle production by over 100 percent since 2009 – paired with rock-bottom financing offers that pose risk down the road.

10. With all of those millions of new automobiles coming off the production lines, car companies need to boost sales. So in order to feed demand to keep up with supply, they incentivize sales people and consumers alike.

11. In fact, dealerships have increased spending on sales incentives by 14 percent since last year.

12. Auto sales are usually accompanied by in-dealership lending packages, making it hard for shoppers to resist offers of low-money down, low monthly payments, and payment terms extended as long as possible. A

13. All of that comes with an attractive hook for consumers with subprime or marginal credit; offers for “No Credit. Bad Credit. All Credit. 100 Percent Approval,” that are eerily similar to the subprime mortgage ads we saw in the housing bubble.

14. The result is that auto loans in the U.S. have increased by almost $80 billion since 2009 and these days, almost 20% of all auto loans go to people with credit scores of 620 or less, when 680 is typically considered a good credit score.

15. Auto lenders are baiting borrowers by extending their loan terms for longer – a tactic that keeps their monthly payment low so they think it’s affordable, but deceptively drives up the real cost of the automobile as the interest payments compound at a scary rate. The average loan term is now 67 months (5.58 years) for new automobiles and 62 months (5.16 years) months for used autos, both record highs.

Subscribe to the blog and look for part 2 of this article, when we cover more pressing data on why there is an auto loan subprime bubble in the U.S., or email us any time!


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