How ironic it seems, reading about auto loan crisis while a running advert of a car loan lender beckons on the foreground. It’s almost laughable, like being tied and gagged while the Hermes of doom tells us all about the bad news.
Yes, the situation is getting worse. To start with, light vehicle sales dropped in April – down by 4.7 percent compared to 2016’s record. And, almost all mass market automakers reported declined numbers.
The thing is, in an economic model where growth is expected, the pros squirm at the news of contracting figures. When the numbers stop hitting the quota, that could only mean it’s hit the plateau, and that “it’s about to get ugly from here.”
Currently, the great American auto loan debt sits at $1.2 trillion. That’s record high. But what is very alarming from that already overwhelming number is that 25 percent of its entirety are owned by subprime borrowers. These are considered the risky borrowers or those who are most likely to default on their loans. Of course, a three-digit number does not tell the totality of a person’s creditability, but it’s a measure of probability.
The fear for a possible crisis is even more aggravated by the number of delinquencies as of late. Delinquency rate has reached pre-crisis levels, one that wasn’t seen since 2008, before the nation slid into recession. And just when you know it can’t get worse, we are shown with the increasing terms in auto loans, a growth nobody would really want to see at the bird’s eye view. Today, the average auto loan length is at 68 to 72 months.
That’s not all. Prices of new cars have soared while used vehicle prices have significantly fallen, owing to the number of repossessions from increasing defaults.
Are the experts concerned?
You can say not so much. Or at least as long as the mortgage default rates are low, there is less rattle on the auto loan side. Still, that does not stop the big players from tightening their game and playing on the safe side. Of course, nobody would want to take a fall, just in case.
Looking for the silver lining
The number of truck sales is seen as a positive, being that trucks are usually indicators of business, and are therefore positively correlated with good economy. The rise in incentives is also seen as a promising strategy to increase new car sales.
Still, whether the negative trends will hold is a big possibility. It’s no use denying the current realities. As investors, preparing for the worst is always the wiser way, be it a bigger fish or nay.