Auto Loan Bubble: How to Profit on $1.16 Trillion in Debt

Record low interest rates have made cars more affordable. On top of that, millions of Americans have bought above their means. This has led to an auto loan bubble to the tune of $1.16 trillion. Subprime loans are going to bite back as the auto loan crisis unfolds.

Americans that prepare can protect themselves and profit from the bubble. With any crisis comes opportunity. And if you’re in the market to buy a car, it might be good to wait. You’ll likely find better deals as more auto loans default.

This bubble is one of many due to the long bull market. Although, it doesn’t make my list of six market indicators that I detailed last week… Stock Market Crash 2020 – Six Bear Market Indicators.

Auto Loan Bubble and Interest Rates

Total vehicle loans in the U.S. have climbed from $700 billion to $1.16 trillion. The chart below shows the huge run-up next to interest rates…

Auto Loan Bubble 2019
Source: Federal Reserve Bank of St. Louis

Thanks to low rates, total auto loans have far outpaced previous highs. The 2008 recession only put a small dent in total loans outstanding. The car buying spree and loan growth isn’t sustainable.

To make things worse, some car manufacturers have created their own financing arms to sell even more. For example, Ford’s total loan portfolio topped $46 billion last year. Some auto dealerships offer zero percent financing… but with a frugal mind, we know that this benefit is already baked into the price tag.

Low rates and easy lending standards have encouraged people to buy cars they can’t afford. More borrowers with poor credit ratings are starting to miss payments.

Subprime Auto Loan Crisis with Looming Defaults

The federal funds rate has climbed from near zero in 2015 to 2.4% at the start of 2019…

Federal Funds Interest Rate Climbs
Source: Federal Reserve Bank of St. Louis

The Federal Reserve stopped hiking interest rates but the damage is already done. New car buyers are paying 6.19% for a 5-year loan compared to 4.99% in 2018.

Average new lease payments have climbed from $436 in Q1 2018 to $457 in Q1 2019. That’s according to Experian. This payment bump puts pressure on millions of Americans trying to make ends meet. And borrowers on the low end have it worse.

Subprime and deep subprime make up just over 20% of the total loans. They’re feeling the squeeze as average payments have climbed by $22 and $43, respectively. As a result, 30-day delinquency rates have risen for most lenders. This change will lead to more defaults.

Used Car Values Dropping

What’s the silver lining here? One big benefit to the coming correction will be lower used car values. Price tags will drop as repossessed cars fill up lots and some car buying demand disappears.

If you’re in the market for a car and it’s not urgent, it could pay to wait. You might find better deals soon. And in some places, used car values are already dropping.

At the start of 2019, auction volume dropped by 10.4% from January 2018. With the slowing economy, it’s likely that used car values will drop further. Plus, the auto industry is undergoing other big changes…

Car Ownership and Dealerships

Part of the American dream used to be buying your own car. Although, the times are a changing. The sharing economy is taking its toll.

Thanks to ride sharing apps like Uber, car ownership in the U.S. is dropping. City dwellers are opting out of buying cars. This makes sense since they’re the second most expensive asset people buy (behind homes)… but they sit around doing nothing in parking lots for 95% of their life.

The auto industry is set for disruption. Another bloated area in the auto world is dealerships…

Politicians protect car dealerships. Laws prevent you from buying directly from manufacturers. Yet, this can add thousands of dollars to the price tag on your car… but thanks to Elon Musk and Tesla, they’re fighting to sell directly to consumers. Although, there are a lot of lobbying dollars fighting against this change.

Overall, the future looks bright for transportation. The auto loan bubble is a hiccup and with this crisis will come opportunity. Car values will drop and I’m more excited for driving innovation. I’ve researched autonomous driving for over five years and put together this unique research: Self-Driving Cars: Top 25 Pros and Cons.

Invest mindfully,

Brian Kehm

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