We haven’t had an auto loan in decades. But our kids do. And most car owners do.
The Auto Loan Crisis Just Hit a 32-Year Record: What It Means for Car Prices - CarEdge
The author suggests that a subprime auto loan bubble is forming, and that may be true. However, he doesn’t indicate what the ratio of the ratio of dollars in prime and subprime loans is. Bankers might not be as alarmed as they should have been during the mortgage crisis because this subprime issue isn’t nearly as large. Also, subprime loans already factor in a significantly larger number of defaults by inflTing interest rates.
Seems like some of those buyers of those 84 month loans on $75K trucks and SUVs might be regretting their decision?
These loans are asset backed loans. A repossessed car is a much more liquid asset than a house. Easier and shorter timeframes to seize the asset. The cars can go to auction and cash out in a week or two. Far less time than the legal proceedings and sale of a home in foreclosure. And in many states the borrower is still on the hook for the difference between loan value and the auction price the car brought.
I only recently took out my first car loan in 20 years. I did it because I can make more leaving the money invested than the loan rate and I avoid paying income tax on the lump sume IRA withdrawal for the car. Win-win. But it still feels weird.
Sure, these are “asset-backed loans” where the collateral may not ever be recovered, and where even under ideal circumstances (vehicle is found quickly in good condition), the collateral will sell at auction for less than half of the loan balance. And when loans are securitized and sold, managing losses becomes much more difficult than when a lender holds its loan portfolio in-house.
There is most definitely an auto loan bubble right now, which will most definitely spread to the larger financial markets, once an economic shock forces large numbers of borrowers to default. And while it’s true that a lender can file a lawsuit against the borrower, and attempt to collect a deficiency balance, most borrowers in that situation would either be unemployed (no wages to garnish), and/or declare bankruptcy because they simply cannot afford to pay the judgment and still eat and live indoors. Lots of money is going to be written off, and finance company stock prices don’t currently reflect this reality.
In my professional experience I’ve observed the same and bcohen2010 is entirely “right on point”.
In some ways this is similar to the Mortgage Crisis but in some ways worse:
- 1. If your house was reposessed you could still find a way to work but without a car?
- 2. A house still had significant value but a broken down used BMW?
- 3, Homes are generally have a 50 year life and exempt from depreciation but a 10-15 year old BMW?
- 4. Easy to locate, lien and “attach” a home but a mobile vehicle? With a home you can easily “Attach” the property/collateral but to locate a vehicle that maybe stored at a friend’s or “Aunties” house?
- Bottom line, as economically things continue to get worse we’re going to see a lot more vehicle defaults in loans and leases that for the investors aren’t recoverable.
I’ve never bought a car I couldn’t pay off in cash immediately
Ditto
However, a whole lot of people seem to buy cars based on how much per month they will pay if they take out a car loan… albeit without considering how many years those payments will run, and how much the total cost will be when all is said and done.
IMO, coupled with the crisis in loan defaults, is the fact that the job market has turned-out to be… not so great. When the US Bureau of Labor Statistics adjusted their previous stats regarding jobs that were added, the corrected figures turned-out to be quite weak.
Its nice to be able to pay cash but this is not the case for most people under 50. When we need a car we need a car and saving fir one is many time not an option. We learn though and become more conservative with age. I usually drove cars to 200, 300, 400, and 500k so they were fully amortized. Not everyone can do that.
Now back in the bad ole days in 1980 an 81, my CPA brother in law got a loan for 17% he said as a special favor from the bank. I laughed but then in 81 my bank loan was 18%. Two years later the rates came down and i went to refinance. Th3 bank said why bother and got another explanation of the rule of 78ths. Last car bank loan i got. In 86 GMAC was 7%. Future years we got 3% and 2% which we came to expect. Now zero % or we would have just paid cash. We have been fortunate but also understand the other side. Enough said.
Suffering builds character. My parents were products of the great depression. They instilled in their children that delaying gratification until you had a significant nest egg was the best approach to long term stability. And to live within your means to build wealth steadily and achieve a level of comfort where you can withstand the inevitable downturns or financial impacts.
The longer you live, the more history you have to reflect on. Everything is sinusoidal; peaks and valleys. If you have put off spending every dime you have while the getting is relatively good, the better chance you have money left to ride through the rougher patches.
Financial valleys create opportunities for those with money to spend. The bursting auto loan bubble results in more used vehicles on the market and lower prices overall. That is the time to buy.
Bing raised a good point, that it’s too easy for us Old Farts to preach financial conservatism when we had all the benefits and denied them to the next generation.
We had very low cost State College tuition and Skills Training. They have $20,000 tuition and the loss of Union apprenticeships..
We had tuition Grants, they have tuition Loans.
We had free, quality HS that prepared us for the next step and well paying, stable jobs waiting. They have the choice and cost of years of additional training or low paying minimum wage jobs.
And when we entered the job market we had paid health insurance, pension plans and job stability. They have Gig Jobs and job security that depends on the company’s last quarter profits.
My point is that we had the opportunity to build wealth and credit worthiness pretty much right out of the gate while the current generation enters an uncertain job market several years later and already saddled with debt.
All of those things you mention “we” had still exist where I live, with the exception of pensions. And BTW, I don’t have any pensions from my 50+ years of working. From what I see, most of today’s youth are benefiting from their parent’s wealth accumulation.
State colleges exist here and residents get discounted tuition. We have many avenues for grants for students including some local funds set up by individuals or estates.
We have high quality schools with many options presented to students including vocational options.
Building credit involves planning and sacrifice. Take out smaller loans and pay them on time. That’s what I did and it’s still a viable path.
Obviously, this will vary from one state to another, but–overall–the cost of tuition at state colleges and universities has increased to a much greater extent than salaries have. The tuition cost remained stable at Rutgers through my undergraduate years, and I can still recall my father writing $125 checks for each semester’s tuition. Coincidentally, that was his approximate weekly salary. So, back in the '60s, it cost $1,000–in total–for a NJ resident commuting student to obtain his/her bachelor’s degree there.
Fast forward to today, and the cost of tuition at Rutgers is now $15k per year, or $7,500 per semester. I don’t know anyone who earns $7,500 per week. Yes, those people exist, but I don’t know any of them, and–just as surely–they probably wouldn’t be too concerned about college tuition costs.
Just for the heck of it, I checked the annual tuition at Penn State, and–for PA residents–it now tops $20k, so it’s not just NJ that has hiked its tuition costs.
For years I have felt certain that requiring 20%down/36mo car loans would result in a much improved economy from Detroit to Des Moine
Very few companies have pensions anymore.
As it turned out, I’m happy that I had 403Bs and 401Ks instead of a defined benefit pension. I was fully invested in stocks and no bonds until I was within 2 years of retirement, then I reconfigured my funds to include bonds. I’m four years into retirement and I’m still slightly higher weighted towards stocks.
About the same here. Some of the years I did consulting being paid on a 1099 I did a SEP program those years. I was abl to put a lot more money into the SEP then I could in a 401k. It made up for the years I worked for a consulting company that didn’t have a 401k program or you couldn’t participate until you worked for them for 6 months.
Take a $35,000 vehicle (new or used), put 20% ($7K) down and with 0% interest that $28,000 over 60 months equals $467 a month for payments, figure in insurance and it is even higher, that is not doable for a lot of folks, but drop that 60 months down to only 36 months with 0% interest rate and now you are at $778 a month plus insurance and interest and that is probably NOT doable for over 1/2 of America, but then you add in interest rate for Fair credit and that same 36 month loan is out of reach for most folks, heck even the 60 month loan is too much…
If you can swing it, that’s great, but the average single income in America is what, around $65K, so at 10% to gross income, your car payment shouldn’t be over $542ish a month… imho
When I worked for GM, I had a pension plan. I also contributed to the 401K. The matching was good and investment options were wide. Coworkers wondered why I did this. My answer; I do not trust GM to have my pension when I retired.
We all then got spun off as public company, Delphi. Still had a pension but when Delphi filed for bankruptcy, I found another job and pulled my pension out in a lump sum and dropped it into an IRA. My new company had a 401k and I used it. When Delphi exited bankruptcy everyone’s pension went into the PBGC. This was v.e.r.y h.a.r.d on younger retirees as their pensions were slashed. It also nearly forced the worker to stay until at least 62 and many 65.
I retired much earlier than that funded by my IRAs. The 401k program and similar programs I am not familiar with, allows worker mobility like never before. Leave a company for a better job and take your pension with you.
No doubt. One of my pet peeves and I have read about the trend for people to be foregoing the more prestigious universities over the exorbitant tuition costs. Here the state university is discounted 50% for state residents and is a modest $15k compared to the more prestigious local universities, including MA. It seems no different than almost everything today. Look at something as simple as McDs. Back in the day we’re talking about tuition costs being a week’s salary, you could also buy a meal at McDs for $1… 
Local high school offers elective classes at the Seacoast Science and Technology center so students considering that path or just wanting to explore certain areas can take classes during the normal school day. They have unbelievable number of elective courses, clubs and extra-curricular activities to choose from. They encourage students to take charge of their education versus a rigid structure with few options. Don’t get me started on the sports options- they have a bass fishing team. I thought we had it good when I was that age…
We got a quick meal at BK last week. Mrs JT got a Whopper Jr and I got a regular size Whopper Jr meal. It was over $15. Ouch!