My wife and I started looking for a new car recently.
Our old, faithful Volvo 850 — nearly 20 years old now — is long (way long) past its prime. I know, I know — I should have gotten rid of it sometime during the George W. Bush administration. But the miles aren’t that high on the engine, and the body still looks good. Why ditch something that’s still reliable?
That’s not the norm for most car buyers, I know. (Most people keep a new car for six years.)
We also like to pay cash; I’d rather not have debt.
That too is unusual. Auto loans are the fuel for America’s car-buying boom of the last few years.
There’s reason to worry that the car-buying boom could soon come to an end, especially as the Federal Reserve raises interest rates even further…
The No. 1 Stock to Own for 2017
Wall Street legend Paul Mampilly just revealed his No. 1 investment for 2017 … a tech stock he says is about to hand those who act fast the opportunity to make a lifetime’s worth of gains in just months.
It’s all about so-called subprime auto loans.
And yes, if this sounds familiar, it is. These are very much like the infamous subprime mortgages of the 2008 financial crisis — high-risk loans taken out by people who have low credit scores.
The Auto Market’s Reckoning
The folks at S&P Global Ratings recently analyzed the data on subprime car loans. They found that, as of January, 9.1% of these accounts are in default on their payments.
That’s the worst rate since 2010, when the recovery started.
And the trend appears to be picking up steam, since in December, 8.5% of subprime car loan holders were in default, and a year earlier, 7.9% were behind on payments.
It’s a troubling issue when you consider the bigger picture…
- More than 6 million people are behind on their auto payments by at least 90 days or more.
- Subprime auto loans account for about 20% of today’s car purchases.
- The recovery rate (repossession and sale) on subprime auto loans is
34.8%, the worst in over seven years.
But there’s more. A decade ago, the average length of a car loan was 63 months…
Today’s average car loan runs 68 months.
And according to Automotive News, larger numbers of car buyers are now taking out loans of 73 to 84 months in length!
The Next Market Bust?
The risk here isn’t so much another economic collapse like the one that blindsided banks in 2008. Auto lenders and ratings agencies see all the same data. They know the risks and can adjust (and raise the cost of taking out a risky loan).
To me, this is yet another big, bright warning sign of the problem that I’ve been warning you about: Americans are carrying more debt on their personal balance sheets than they can afford to pay.
But with the Fed raising interest rates last week (and intent on raising rates at least twice more this year), it makes the very loans that have powered the U.S. economic rebound (such as it is) that much more expensive.
As long as interest rates remain low, people can keep extending terms, rolling over more and more of what’s owed. But everything has its limits.
If the recent subprime car loan data is any indication, we may be at those limits already.