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Why America Is Witnessing Record Car Loan Defaults Despite a Booming Economy?

On Thursday, July 11th, 2019

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If you are living in America, the Promised Land for a global population in search of an affluent lifestyle, getting access to personal transportation in the form of a car is absolutely essential and rates higher than even getting a roof above your head. This is primarily because typically workplaces, shops, entertainment destinations, doctors, schools, etc. are often situated at great distances and virtually impossible to access without a car at your disposal. For many occupations, the ownership of cars is essential as without it, getting employed is impossible. Small wonder that in 2018, as many as 17,274,250 light vehicles comprising cars, SUVs, and trucks were sold in America according to https://www.marklines.com. The extent and scale of public transport like buses and trains are not considered up to the mark and a viable alternative to personal car ownership. According to research, if you own a car, your life is more likely to be stable and your bank balance healthier. Unless you are among the increasing number of Americans drowning in debt due to their profligate credit card usage and purchase of cars that they really can’t afford on their incomes.

Auto Loan Sector – The Signs of Increasing Disquiet

In recent times, there have been quite a number of reports that paint an increasingly grim looking picture of the auto loan sector. According to statistics released by the Federal Reserve Bank of New York, a mindboggling seven million Americans were at least three months behind on their car loan repayments. The figure is actually a million more than in 2009 when the last economic recession ended. As a share of the total car loan market, the delinquencies are undoubtedly below what was witnessed in 2010, when most households were experiencing the worst impact of the falling economy and can be attributed to the general growth experienced by the automotive loan market. By mid-2018, Americans had taken on car loans of $1.26 trillion, a whopping increase of 75% from the level in 2009, and a sign of the national economy bouncing back very healthily.  However, the worrying aspect for economists is that the rate of delinquencies on car loans has continued to rise steadily since then.

Households Experiencing a Financial Crunch

According to financial experts and economists, the increasing car debt delinquency is a signal that all is not well and households are increasingly coming under severe financial stress. According to the hedge fund manager, Steve Eisman, who became famous for his prediction of the collapse of the US housing market that was depicted in the book and film, The Big Short, told the Financial Times that auto loans tended to be even more stable than home loans because conventionally, most Americans tended to default first on their mortgage, and then on the credit cards, and auto loan. So, when you see a growing trend of households failing to make their car loan payments, it implies that they are under severe financial duress, so much so that it is becoming impossible for them to protect what they think to be their most vital asset. As a NationaldebtRelief.com consultant observes, what most analysts fail to appreciate is that even in an economy that is bouncing back with vigor, the wages are, by and large, stagnant, the cost of living is rising steadily, and a large number of Americans are already dealing with credit card debt and student debt.

Dependence on Cars Is Not Sustainable

According to market observers, the steady rise in auto debt is a clear indication that Americans seem to be overly dependent on their cars and that too in a way that is non-sustainable. Essentially, this means that Americans are buying cars that they really cannot afford. The problem is exacerbated even more by a host of car loan options that are basically predatory, forcing many Americans who are the least able to shoulder the debt deeper into a debt trap. Greedy auto financiers are not hesitating to extend high-interest loans to subprime customers with poor credit scores and inadequate incomes – the share of such weakly structured loans is as high as 26% of all car loans extended in 2016, a sharp rise from the figure of 14% in 2009.

Record Car Loan Defaults

Questionable Practices by Auto Loan Companies

A report by the U.S. Public Interest Research Group attempts to explain how weak auto loans are structurally similar to the infamous subprime mortgages that sent the economy crashing in 2008. According to the report, the increasing demand for high-yield bonds by investors was among the chief factors that encouraged financiers to loosen the car loan lending standards. In the period 2011-mid 2019, more banks relaxed their credit standards than tightened them, which made it far easier for customers to qualify for car loans.

There were quite a few lenders who engaged in lending practices that were to say the very least, questionable and highly reminiscent of the home loan trends that caused the housing market crash of 2008. These included entertaining customers for auto loans without really trying to evaluate if they were capable of repaying them or not. A leading auto loan company like Santander Consumer U.S.A. Holdings Inc was found to have verified the credit of customers in only 8% of the cases that it subsequently sold to investors as bonds for a whopping $ 1 billion. Some of them went on loan disbursal sprees just to increase the number of loans that could then be bundled and sold on the stock market for high profits.

Conclusion

Some experts refuse to get excited by the number of defaults on car loans saying that the effect can never be the same as that of the mortgage crash simply because the car loan market is just a fraction of the housing market. However, undeniably, these trends spell trouble for countless Americans and are suggestive of an economy riding on bad loans. Despite, opinions to the contrary, the increasing level of auto loan debts and defaults suggest that the ownership of a personal vehicle is not necessarily an indication of individual affluence but rather a Catch 22 situation. If you can’t afford a car, you may end up economically deprived but if buy a car without having the money to pay for it, you will fall into worse trouble. Vehicle sales may be considered a bellwether for the American economy; however, the state of the auto loan sector may actually suggest otherwise.

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