Financial Déjà Vu: Auto Loan Defaults Increasing


August 2017

By Selina Stoller, Summit AmeriFirst Holdings, LLC

Almost a decade after the subprime mortgage crisis of 2007, the financial industry is embracing another type of subprime debt: auto loans.

More Americans with bad credit started getting auto loans after the recession and often had interest rates as high as 29 percent. Often, these lenders took advantage of individuals who lacked an education and were desperate for a car to get them to and from work.

The influx of investor cash enabled lenders to loosen their standards which increased the number of risky loans in the market that carried high rates and questionable terms.

Wall Street re-created the same crisis that turned subprime mortgages into an economic nightmare: thousands of auto loans for subprime consumers are packaged into complex bonds.

New car loans lasting 73, 84, sometimes even to 96 months have soared. Between 2009 and 2016, loans issued to people with poor credit jumped from $52.6 billion to $119 billion, an increase of more than 126 percent. About20 percent of auto loans in 2016 went to consumers who were considered subprime.

The total number of auto-loan securities packed with “deep” subprime loans increased from 5.1 percent to 32.5 percent in the last few years, according to Bloomberg. Moreover, auto loan fraud is at a level that hasn’t been seen since the mid-2000s.

To combat this, lenders could be forced to tighten their standards. Financial institutions have slightly pulled back this year on issuing loans to subprime borrowers, but it may have been too little too late.

To be sure, the auto lending boom almost certainly will not cause an economic crisis the way housing did in the 2000s. Auto loans currently comprise $1.17 trillion of outstanding debt in the United States; mortgages account for just $9.09 trillion.

  • 1 Aug, 2017
  • Josh Smith

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