Regulators are increasingly airing concern about the millions of Americans who are falling behind on their car loans, while auto lending is growing at a near record pace. In November 2016, the Federal Reserve Bank of New York noted increasing distress among auto borrowers with shaky credit, as subprime delinquencies rise. The large number of delinquencies come at a time when unemployment is low, so borrowers should typically be able to make their payments. That such serious trouble is emerging in a relatively good economy suggests that lenders have been loosening their standards and letting borrowers take on more debt than they can afford. Economists worry that the already large number of Americans at risk of losing their cars will increase to record levels should the economy dip into another recession. Although the subprime delinquency rate is lower than it was in the immediate aftermath of the financial crisis, there is still concern about the sheer number of people who are behind on their car payments, because there are so many more with subprime loans now than in 2009. The general consensus is that the potential effects of this are nowhere near those of the 2008 crisis. However, widespread repossessions could still hurt the economy, as Americans struggle to get to work or go about their daily lives in areas with limited public transportation. Lenders have been willing to take more risks with auto lending, reasoning that even people who are struggling will keep up with payments because they need their cars to keep their jobs, and their households functioning. As a result of rising competition, banks, private equity firms and credit unions have been extending loan terms as long as seven years – longer than many used cars are on the road. There has also been a significant increase in fraud cases, where dealers have misstated borrowers’ income to qualify them for loans.
What do you think the effect of this will be on the economy?
Sounds like another bubble being created for sure: primarily by lenders taking on riskier and riskier loans. Sounds a lot like what we just watched in the Big Short.
ReplyDeleteI don't, however, think this will nearly have the effect the housing crisis did. That was exacerbated by big money from wall street. It still could be detrimental to the American people.
Like the article stated, I don't think this will result any where near the financial crisis of 08, however, it's still a problem of people being irresponsible with their money as well as lenders not doing their due diligence when taking on loans/checking buyers' credit. It seems to be an increasing problem in many areas in our financial markets where banks/credit unions do not do their homework when issuing out loans to people.
ReplyDeleteI agree with both Brad and Nick. People need to more responsible with the loans they take out and lenders need to do a better job looking at credit scores and seeing if people can actually pay off these loans that they are taking out.
ReplyDeleteI think a lot of problems with things like car loans are surrounding the sales process and culture involved in quite a few kind of sales jobs. There are tremendous pressures such as that from upper management to meet sales goals and for the employees who need to earn a paycheck through commissions.
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