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Could Auto Loan Delinquency Trigger Economic Collapse? Lombardi Letter 2017-11-28 02:20:49 auto loan auto loans car sales economic collapse market crash subprime Toxic auto loans are the subprime mortgages of our time. They have the potential to trigger an economic collapse and/or a stock market crash. U.S. Economy https://www.lombardiletter.com/wp-content/uploads/2016/12/Car-Loan-150x150.jpg

Could Auto Loan Delinquency Trigger Economic Collapse?

U.S. Economy - By |
Car Loan

Rising Auto Loan Delinquency Triggers Subprime Mortgage Nightmares

Have Americans learned their lesson from the 2007–2008 subprime mortgage disaster? This question begs for answers, because the number of auto loans falling into delinquency suggests that the answer is “No.” The toxic auto loan is the subprime mortgage of our time. It has the potential to trigger an economic collapse and/or a market crash.

About six million Americans are more than 90 days late on their auto loan payments. (Source: “Some 6 million Americans are delinquent with auto loans and it’s going to get worse,” MarketWatch, December 3, 2016.)

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Yes, the fact that auto loans are increasing should be good news, but fewer beneficiaries of such loans can pay them back. The ease of getting the loans, meanwhile, puts more people on the highway to debt.

Auto loans are on the rise because consumers are convinced that they will manage to pay the installments. On the other side of the equation are the loan providers—not the main banks or lending institutions—who seemingly encourage the provision of loans according to a “standards-be-damned” policy.

Before Phenomenon Turns into Auto Loan Bubble, Economists Have Issued Warning

Economists fear that if the U.S. were to go into recession, the already-high number of people at risk of having their vehicle confiscated (repossessed), could out-accelerate a Corvette. According to the available numbers, some six million Americans are already at risk. (Source: Ibid.)

The default rate on housing loans has waned compared to the months immediately following the 2008 subprime crisis. But the number of Americans who applied for this type of loan to buy a car has risen since 2009.

If you think that it’s not useful to compare the mortgage crisis and the subsequent financial turmoil, think again. In 2008, in fact, trillions of investment dollars were linked to the U.S. housing sector. The car loan market has disbursed some $1.1. trillion. (Source: “Car loans now top $1 trillion as delinquency rates rise,” USA Today, September 7, 2016.)

While a wave of defaults would not have as intense a domino effect on the banking system as the subprime collapse, general financial risks exist. Another market collapse, followed by economic collapse is possible, if not probable. Car sales have risen 28.7% to 12,150 vehicles in the first 10 months of 2016.

Rising Car Sales Tempting for Auto Loan Providers

The good performance of the auto sector in general, suggests that the financial industry could be tempted by this market. It could trigger a reliance on this segment, rather than on personal or housing loans.

The combination of rising car sales and rising car loans is what has raised concerns. The other fact is that the average cost for a new car has increased substantially. According to statistics, on average, a car loan in the U.S. is worth $29,880.00. This is almost five percent higher than a year ago. The average monthly payment for such loans is $499.00. (Source: Ibid.)

Those figures are high enough, but they’re rising and showing no sign of slowing. Some loans are long-term, lasting up to seven years. Keeping up monthly payments equivalent to over a quarter of a regular person’s take-home pay these days is a huge risk.

The easy availability of car loans has fueled another troubling phenomenon. Edmunds.com, Inc. suggests that the number of people reselling their vehicles to buy a new one—even though they still have to repay large sums on their previous car loans—has reached a record level. (Source: “There’s finally a sign of trouble with auto loans,” Business Insider, November 29, 2016.)

At some point, somebody will be called to pay back the loans. The higher duration of loans and their accumulation on top of previous loans have raised the likelihood of a massive default. Economic collapse or another market crash are likely. Indeed, if lenders stop lending, tightening the conditions for credit, vehicle sales will suffer. There will be a snowball effect not unlike what happened to the housing market in 2008.

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