The United States might be facing an auto-loan bubble. Americans now owe $1.16 trillion in auto-loan debt, the Federal Reserve Bank of New York reported.
That might create a financial crisis because of rising rates of defaults and faster depreciation of used car values, Bloomberg Markets reported. A related problem is the popularity of leasing that is saddling automakers with lots of trade-ins that can be hard to sell off.
Ford (NYSE: F) might have to cut $300 million from its profit forecast because of a glut of used lease cars. Analysts think of the big car companies including Toyota (NYSE: TMC), Honda (NYSE: HMC) and Nissan might be facing similar problems. This means big carmakers have to sell off vehicles at a loss, which will drive down used car prices and make the problem worse.
Underwater Car Owners
A related problem is underwater car owners; people whose vehicles are worth less than what they owe on them. This is occurring because of higher new car prices; lower used car values. and longer loan terms.
This can lead to defaults and repossessions which can wreck an individual’s credit and cost automakers a fortune. Unpaid auto loans are a growing problem; there was $23.27 billion worth of delinquent auto loans in December 2016 – a 14% increase over 2015.
The growing rate of delinquencies is leading to concerns about a subprime auto-loan crisis similar to the subprime mortgage catastrophe of 2007. A major cause of this is the weakening of lending standards in order to increase vehicle sales.
A major problem is that many subprime auto loans have been packaged into derivatives and sold as investments. That might put some banks and investors at risk; but the size of the problem is nowhere near the scope of the Great Mortgage Bubble of the last decade.
Dark Times Might be Ahead for Auto Industry
It looks as if automakers, dealers and lenders might soon be feeling some serious pain. The auto industry is now highly dependent on financing and vulnerable to drops in sales. A major menace to automakers is one that threatens realtors and homebuilders; rising interest rates.
The boom in auto sales is driven by low interest rates on car loans. If the Federal Reserve starts raising rates it might become harder to borrow money and buy cars leading to lower sales.
An even greater threat to automakers might be the used car glut; which may drive down prices and cut into new car sales. Volatility and dark times might be on the horizon for the auto industry.