(Opinion) Auto Loans: A crisis in waiting?

You would have thought the events of the last five years would have taught banks (Ok, not so much) rating agencies and insurance companies that dabbling in subprime loan debt is an unwise decision to say the least, but with the news of the boom in sub-prime auto loans, not much has been heeded. 

 Auto loan lenders, apparently not privy to the cause of the crisis five years ago are dropping barriers in the way of borrowers with bad credit reports taking on debt to buy cars to the chagrin of analysts and the joy of car dealers[1]. This may be a key factor in the current recovery and growth of the auto industry as there is, thanks to subprime auto loans, “more demand for new cars and more money available to finance them”[2] .

However these loans are toxic as dealers who sell them have an almost non-existent moral incentive to tell the truth about what they’re selling with lenders predicting that “auto loan delinquencies will go up”[3] . The current Boom in Subprime auto loans and the auto industry is largely down to the fundamental problems at the crux of why the crisis happened in the first have not really been addressed.  This is because these problems are more historic than they are financial or even economic.

Wages for ordinary people have been on the decline for the last 30 years which saw an explosion in credit as a response to their wages failing to cover expenses (rent, food, holiday etc). the bottom fell out of this process in 2007 when deals made by American banks went bad leaving the global economy has been reeling ever since as politicians have spent more time trying to shore up the financial system than solve the main problem, the lack of well-paying jobs and the less than honest business ethics of credit card and loan providers.  

The effects of defaulting on Auto loans are damaging as it can seriously affect credit history of borrowers, their ability to get loans in the future, and the car bought with the loan can be repossessed as the car is usually considered ‘collateral’[4]. Most people who have taken out auto loans are likely to be subject to the consequences of default as “more than half of… (Auto loans) default” due to astronomical interest rates[5]

However there appear to be some good news as Marketwatch reported a drop in May this year was the “lowest in its (the Auto loan default rate) 8+ year history” with another decrease a month later[6].

In sum, while the subprime auto loan market may be booming and the rate of default declining slightly, the systemic problems that underlined the 2007-2008 crisis still exists and can send the auto loan default into record figures of debt at any time as families still find it hard to cover expenses without credit and the job market offering jobs that are weak in wage and benefits. Lenders have not learned from the mistakes of 2007-2008 but , hopefully, for their sakes, they do not get a second lesson.

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[1] M C. White, 2012, Is Subprime Lending Fueling the Auto Surge?,

 http://moneyland.time.com/2012/07/12/is-subprime-lending-fueling-the-auto-surge/

[2] Ibid

[3] Ibid

[4] Carsdirect.com, 2009 Defaulting on a car loan: the effects of Car Loan Default, http://www.carsdirect.com/auto-loans/what-happens-if-you-default-on-a-car-loan

[5] L. Picker, 2012, Why subprime Auto loans default,

http://www.nber.org/digest/dec07/w13067.html

[6] Marketwatch, 2012, ConsumerCredit Default Rates Decreased for the Sixth Consecutive Month According to the S&P/Experian Credit Default Indices,

http://www.marketwatch.com/story/consumer-credit-default-rates-decreased-for-the-sixth-consecutive-month-according-to-the-spexperian-credit-default-indices-2012-07-17