New vehicle sales in the US have been on a tear in 2014, rising 5.6% to 16.5 million units, the highest since banner year 2006. Light-truck sales jumped 10%, cars edged up 1.8%. The industry is drunk with its own enthusiasm.
Now for the bad news:
Interest rates for six-year new-car loans are as low as 2.75%, according to Bankrate.com. Loan terms can be stretched to seven years, to where these younger buyers will be awfully close to middle-age before they finally get out from under it. Loan-to-Value ratios have soared well past 100%; everything can be plowed into the loan: title, taxes, license fees, cash-back, and the amount buyers are upside-down in their trade. The package is governed by loosey-goosey lending standards. Bad credit, no problem.
And that’s exactly the problem.
Over 8.4% of subprime auto loans taken out in the first quarter of 2014 were already delinquent by November, according to an analysis of Equifax data by Moody’s Analytics for the Wall Street Journal. That’s the highest rate of early subprime delinquencies since Financial-Crisis year 2008.
Stuffing people into cars they can’t afford and ultimately may not be able to pay for is big business. Auto loans to subprime borrowers (credit scores below 640) make up over 31% of all auto loans, according to Equifax. Outstanding loan balances have soared nearly 17% over the last two years. At this rate, they’ll breach the $1-trillion mark by the end of the first quarter this year.
Eventually we might learn that free money, even in the form of cheap credit, won’t make people rich.
Meanwhile, wasn’t Dodd-Frank supposed to protect consumers from “predatory” lenders — or did the auto industry get a regulatory by on that, just to make the President’s so-called rescue of GM look better than it really was?
Join the conversation as a VIP Member