It’s not just about the price, auto loans are getting out of hand too


As you probably know, now is not the best time to buy a new vehicle. While you can currently sell your vehicle for more than its realistic value, the economy is anything but stable as inflation and supply shortages spoil the job. A lack of semiconductor chips has caused the auto industry to stutter endlessly throughout 2021, with the problem becoming so severe that some manufacturers have built unfinished vehicles just to give their employees something to do. Ford is even considering a strategy to ship these units directly to dealerships so they have something in the field – effectively making its retail network responsible for final assembly.

But the logistical nightmare is only part of the story. Auto loans are also becoming unsustainable as the terms get long and thin. Cars continue to get more expensive and the average consumer loses purchasing power. The preferred solution is for financiers to extend agreements so that clients can continue to make the same monthly payments while accumulating more interest over time. While effective in the short term and intended to save the banks money as we all get more and more indebted, one wonders how it is happening on a larger scale.

History would suggest rather badly.

The last great US recession ended in 2009 and was preceded by rising prices and lengthening loans. But the average life of a new vehicle was reduced to 63 months in 2010. Since then, they have increased and now exceed 70 months. According to the US Department of Labor, used cars were 45% more expensive in June 2021 than they were in June 2020, while new cars saw an increase of almost 6% in the same. period. But companies have been successful in keeping monthly payments from spiraling out of control by extending deadlines. You still pay more overall, but you’ll feel less of a sting every four weeks.

Blame COVID restrictions, increased regulatory pressure, predatory lending tactics, a chip shortage created by mismanagement / our own obsession with electronics, and the industry burning tons of money in the service of the prosecution of electrification and the nebulous concept of “mobility”. They’re all to blame, but the economy has also taken a pretty wild turn in general and that’s making a lot of people nervous for the future including The Wall Street Journal.

The outlet recently released a study noting that this change has been particularly hard on the bottom end of our economy. Longer term loans are offered to subprime borrowers, and ultimately they pay more for the same product than someone who could afford to put more money on the table and make payments. larger monthly. However, the subprime and deep subprime segments now appear to be completely abandoning the market.


A 2018 analysis from Moody’s Investors Service showed that the cumulative losses of longer-term prime auto loans (those of 72 months or more) created between 2003 and 2015 were two to five times greater than shorter-term loans. term created during the same period. This is in part because longer-term loans tend to go to less creditworthy borrowers, according to Moody’s. The credit profiles of car buyers are brighter today, and consumers have saved more through stimulus payments and are spending less during pandemic lockdowns. The average credit score of new and used car buyers has increased since 2016, according to Experian. The share of prime loans has also increased during this period, while subprime loans are near their all-time low.

The empty bank accounts of car buyers are helping some of them to close deals involving more money. Loan-to-value ratios for auto loans have “improved as people invest more money in transactions,” said Fahmi Karam, chief financial officer of Santander Consumer USA Holdings, on the lender’s earnings call in April.

The high prices of used cars also meant that lenders could charge higher prices for repossessed cars in the event of default. Automatic defaults were at their lowest level in 10 years in May 2021, according to the S & P / Experian Auto Default Index. Auto asset-backed securities recovery rates hit all-time highs in April, with recovery rates above 100 [percent], according to S&P Global Ratings. Falling car prices will likely have the opposite effect.

But the selling point remains generally bullish, suggesting that the shift to trucks and crossovers means the average automobile will be better able to retain its value. Vehicles are also being stored longer than ever, with the average age of roadworthy light vehicles now exceeding 12 years. While we would like to attribute this entirely to the industry providing increasingly sustainable cars, sales growth in the United States has trended in the wrong direction – a bit like before the Great Recession.

With Americans buying fewer cars per year, it’s no surprise that the average age of vehicles is increasing. It also doesn’t necessarily indicate that modern automobiles are more rugged, although it likely plays a role. Many are no doubt keeping vehicles longer now that purchasing anything else is becoming prohibitive for a subset of the population. The middle class was already shrinking in this country, with the past two years representing the largest upward transfer of wealth in modern history. Adding a few hundred more billionaires to the list means a few thousand more six-figure automobiles will be sold. But wiping out the wealth of millions of middle-class consumers means that many of them have to forgo buying the vehicles that actually run the industry.

[Image: Pathdoc/Shutterstock]


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