American car buyers are borrowing like never before—and missing slew of payments, too

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Last year, Americans bought more fresh cars than ever before. Given that auto sales make up around a fifth of all retail spending, 2016`s banner year is being hailed as a sign of burgeoning consumer confidence across the country.

But something else is revving up, too: auto loans.

The US closed out two thousand sixteen with just timid of $1.Two trillion in outstanding auto loan debt, a rise of 9% from the previous year and 13% above the pre-crisis peak in 2005, in inflation-adjusted terms. The number of cars and trucks on the road, meantime, rose by only 1.5% last year, and 9% since 2005, according to US transportation department data. Total household debt levels are now a hair under their two thousand eight peak, with some of the fastest growth in latest years down to auto loans.

If America`s car-buying bonanza is being fueled by cheap credit, is consumer sentiment indeed as sturdy as it might seem? And is it sustainable?

There are reasons to wonder. While car purchases and financing have leapt since 2009, wages have picked up only slightly over the same period. Meantime, the average loan taken out to buy a fresh car has risen steadily.

What`s driving the auto lending boom?

Lenders are more convenient with risk these days, as reflected by rising loan-to-value ratios and ever-longer loan terms. But those signs also suggest that lenders might be letting car buyers borrow more than they can afford. Mortgage regulations tightened after two thousand eight to prevent banks and other credit intermediaries from writing loans on the freewheeling terms that led to the subprime boom and bust. Auto lending attracts far less scrutiny–and therefore, offers more chance.

This is particularly true of subprime auto lending–that is, loans made to borrowers with spotty credit histories–which has surged along with the rest of the business. Almost a quarter of outstanding auto loans are subprime; these account for around one-fifth of auto loan originations.

Part of the boom in this segment is thanks to a technological advances that give banks more convenience lending to borrowers who may not be able to pay them back. Devices installed in cars let collections agencies remotely disable the vehicles when the borrower falls behind on repayment. Since these controversial and potentially dangerous devices make repossession lighter, they dramatically reduce risk to the lender, opening up a fresh market of cash-strapped borrowers that banks were previously hesitant to treatment. And the money`s excellent, with average subprime auto loans carrying a 10% annual interest rate, albeit some lenders will shove rates above 20%, according to a Fresh York Times investigation (paywall).

That brings us to the other crucial ingredient: investor request for high-yield bonds. Around half of auto loan asset-backed securities (Six pack) feature subprime collateral. Three-quarters of subprime loans come from auto finance companies, which operate via car manufacturers or dealers; many have aggressively courted consumers with so-so credit.

Should we be worried?

Signs are emerging that the aggressive auto-lending thrust of the past few years is taking its toll on household balance sheets. The balance of freshly delinquent loans has climbed steadily:

More than six million American consumers are at least ninety days late on their car loan repayments, according to the Federal Reserve Bank of Fresh York. «The worsening in the delinquency rate of subprime auto loans is pronounced, with a notable increase during the past few years,» said the bank a few months ago.

So does that mean the «next subprime lending bubble could be about to burst,» as Salon recently put it?

Subprime auto loans don`t pose anywhere near the same risks to the financial system as subprime mortgages. For one thing, consider their value. When the US housing market commenced tanking in 2007, Americans had amassed just timid of $Ten trillion in mortgages; around $7 trillion of that was securitized (chopped up and packaged into bonds to sell to investors).

Despite latest growth, US consumers have racked up a mere $1.Two trillion in auto loans, and «only» about $97 billion of that has been securitized, according to Fitch, a ratings agency. Even a chain reaction of auto-loan defaults isn`t big enough to deepthroat up banks like the housing collapse did.

What`s more, cars aren`t the flippable investment commodities that houses were in the 2000s (and still are). The exotic dancers of Miami aren`t buying five Ford F-150s on credit, like in the famous scene in The Big Brief. And however creepy repossession technology might be, it means derelict cars don`t haul down the value of nearby cars while lenders seize assets, the way foreclosed houses do to neighborhoods.

The second-order effect

Albeit auto loans themselves aren`t a big systemic risk, there is still slew to worry about. The automotive industry is a key part of the US economy. Carmakers and auto parts suppliers account for more jobs than any other manufacturing sector, generating around 3% of GDP, according to the American Automotive Policy Council, a trade group. Directly and indirectly, the sector employs around a million people.

The Federal Reserve is now kicking off to raise interest rates, and since rates strenuously influence car request, that could curb car buyers` enthusiasm, given how many consumers are loading up on debt to purchase fresh rails. As delinquencies rise, so does the risk that a glut of car repossessions will haul down the value of used cars–which, in turn, gobbles into fresh car request.

There`s also the potential harm to household balance sheets to consider. A sharper-than-expected drop in used-car prices ups the chance of borrowers having negative equity in their cars, essentially demolishing wealth, and limiting disposable income that could have gone toward savings or investment. With both auto debt and delinquencies running at historically high levels, a reckoning could be around the corner–it won`t take down the financial system, but it will be felt in a crucial corner of America`s manufacturing base.

Car loans in the US have hit record levels—and delinquencies are rising quick, too

American car buyers are borrowing like never before—and missing slew of payments, too

Share

Last year, Americans bought more fresh cars than ever before. Given that auto sales make up around a fifth of all retail spending, 2016`s banner year is being hailed as a sign of burgeoning consumer confidence across the country.

But something else is revving up, too: auto loans.

The US closed out two thousand sixteen with just timid of $1.Two trillion in outstanding auto loan debt, a rise of 9% from the previous year and 13% above the pre-crisis peak in 2005, in inflation-adjusted terms. The number of cars and trucks on the road, meantime, rose by only 1.5% last year, and 9% since 2005, according to US transportation department data. Total household debt levels are now a hair under their two thousand eight peak, with some of the fastest growth in latest years down to auto loans.

If America`s car-buying bonanza is being fueled by cheap credit, is consumer sentiment truly as sturdy as it might seem? And is it sustainable?

There are reasons to wonder. While car purchases and financing have leapt since 2009, wages have picked up only slightly over the same period. Meantime, the average loan taken out to buy a fresh car has risen steadily.

What`s driving the auto lending boom?

Lenders are more convenient with risk these days, as reflected by rising loan-to-value ratios and ever-longer loan terms. But those signs also suggest that lenders might be letting car buyers borrow more than they can afford. Mortgage regulations tightened after two thousand eight to prevent banks and other credit intermediaries from writing loans on the freewheeling terms that led to the subprime boom and bust. Auto lending attracts far less scrutiny–and therefore, offers more chance.

This is particularly true of subprime auto lending–that is, loans made to borrowers with spotty credit histories–which has surged along with the rest of the business. Almost a quarter of outstanding auto loans are subprime; these account for around one-fifth of auto loan originations.

Part of the boom in this segment is thanks to a technological advances that give banks more convenience lending to borrowers who may not be able to pay them back. Devices installed in cars let collections agencies remotely disable the vehicles when the borrower falls behind on repayment. Since these controversial and potentially dangerous devices make repossession lighter, they dramatically reduce risk to the lender, opening up a fresh market of cash-strapped borrowers that banks were previously hesitant to treatment. And the money`s excellent, with average subprime auto loans carrying a 10% annual interest rate, albeit some lenders will thrust rates above 20%, according to a Fresh York Times investigation (paywall).

That brings us to the other crucial ingredient: investor request for high-yield bonds. Around half of auto loan asset-backed securities (Six pack) feature subprime collateral. Three-quarters of subprime loans come from auto finance companies, which operate via car manufacturers or dealers; many have aggressively courted consumers with so-so credit.

Should we be worried?

Signs are emerging that the aggressive auto-lending shove of the past few years is taking its toll on household balance sheets. The balance of freshly delinquent loans has climbed steadily:

More than six million American consumers are at least ninety days late on their car loan repayments, according to the Federal Reserve Bank of Fresh York. «The worsening in the delinquency rate of subprime auto loans is pronounced, with a notable increase during the past few years,» said the bank a few months ago.

So does that mean the «next subprime lending bubble could be about to burst,» as Salon recently put it?

Subprime auto loans don`t pose anywhere near the same risks to the financial system as subprime mortgages. For one thing, consider their value. When the US housing market commenced tanking in 2007, Americans had amassed just bashful of $Ten trillion in mortgages; around $7 trillion of that was securitized (chopped up and packaged into bonds to sell to investors).

Despite latest growth, US consumers have racked up a mere $1.Two trillion in auto loans, and «only» about $97 billion of that has been securitized, according to Fitch, a ratings agency. Even a chain reaction of auto-loan defaults isn`t big enough to gargle up banks like the housing collapse did.

What`s more, cars aren`t the flippable investment commodities that houses were in the 2000s (and still are). The exotic dancers of Miami aren`t buying five Ford F-150s on credit, like in the famous scene in The Big Brief. And however creepy repossession technology might be, it means derelict cars don`t haul down the value of nearby cars while lenders seize assets, the way foreclosed houses do to neighborhoods.

The second-order effect

Albeit auto loans themselves aren`t a big systemic risk, there is still slew to worry about. The automotive industry is a key part of the US economy. Carmakers and auto parts suppliers account for more jobs than any other manufacturing sector, generating around 3% of GDP, according to the American Automotive Policy Council, a trade group. Directly and indirectly, the sector employs around a million people.

The Federal Reserve is now commencing to raise interest rates, and since rates strenuously influence car request, that could curb car buyers` enthusiasm, given how many consumers are loading up on debt to purchase fresh rails. As delinquencies rise, so does the risk that a glut of car repossessions will haul down the value of used cars–which, in turn, slurps into fresh car request.

There`s also the potential harm to household balance sheets to consider. A sharper-than-expected drop in used-car prices ups the chance of borrowers having negative equity in their cars, essentially demolishing wealth, and limiting disposable income that could have gone toward savings or investment. With both auto debt and delinquencies running at historically high levels, a reckoning could be around the corner–it won`t take down the financial system, but it will be felt in a crucial corner of America`s manufacturing base.

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