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Are Car Loans the Next Big Credit Worry?
By JLP | December 6, 2007
It seems more and more people are falling behind on their car payments. That’s according to this front page article ($) in today’s WSJ. According to the article:
About 4.5% of auto loans made in 2006 to top-rated borrowers were at least 30 days delinquent as of the end of September, up from 2.9% the previous month, according to a Lehman Brothers survey of companies servicing these loans. That is the biggest one-month jump in at least eight years. Lehman says 12% of subprime borrowers, who have poorer credit records, were delinquent on their 2006 auto loans as of September. That is the highest level since 2002 and up from 11.1% the previous month.
This really shouldn’t surprise anyone. I mean if people can’t afford their house payments how are they going to afford their car payments?
According to the article, auto-loan delinquencies are something to keep an eye on because people usually don’t default on a car loan unless things are really bad. So, if we see an increase in defaults, it could spell trouble for the economy.
Expect Hank Paulson to address the media today with the government’s plan to bailout car buyers…
Topics: Cars, Credit | 16 Comments »
December 6th, 2007 at 12:02 pm
The government *should* bail out car owners. Every American deserves to drive a $40,000 Hummer or even higher priced Escalade. (sarcasm noted, I hope!)
I think you are right though – people don’t tend to default on their car payments unless they absolutely have to. Too many people rely on cars for transportation in America and it is too difficult in many places to get by without a car. Cars also represent too much of a status symbol for many people to give them up.
December 6th, 2007 at 12:11 pm
Patrick said:
“Cars also represent too much of a status symbol for many people to give them up.”
You got that right. That’s why I see so many $40,000 BMWs sitting in front of $25,000 houses. Mixed up priorities.
December 6th, 2007 at 12:19 pm
I’m cynical like Patrick. Let’s bail out everyone who bought more car than they could afford. Again, personal responsibility has taken a back seat. Car salesmen are no better than mortgage brokers, and probably worse. When someone comes in and wants a 2 year old used sedan for 15k, the salesman is going to try and convince them that they can get a NEW crossover or SUV for only a few bucks more a month. Plus they will encourage them to buy the undercoating, the special roadside assistance, upgrade to the premium package, and all of this comes with NO MONEY DOWN!
Just like when shopping for a mortgage, these are SALESPEOPLE. They couldn’t give two craps about your financial situation. Their job is simply to sell you something, and the more they convince you to spend, the better they get paid.
I’m actually surprised that car loans haven’t been talked about until now. It is ridiculous to see what some people have for vehicles. Drive through any middle-class subdivision and you’re likely to find upwards of $100,000 or more sitting in each driveway. In many cases, two new cars + insurance is going to put monthly payments even higher than a reasonable mortgage.
But hey, this is America! We are entitled to have a big house, we’re entitled to owning new and expensive cars, and we’re entitled to bitch about it when we don’t get what we want.
It would be nice if every school was required to teach a course on common sense.
December 6th, 2007 at 5:13 pm
This is ridiculous. Where is everyone getting these loans? I’m surprised the credit industry is not a mess…since the government is helping out, I’m quite sure none of these people will learn their lessons.
Meanwhile the responsible of us are still plugging along, paying our house payments, car payments, etc!
Do people really not read through ANY of their loan paperwork as they’re signing it? Do they think they’ll be able to pay twice as much for payments when their Adjustable Rate expands upwards?
December 6th, 2007 at 5:35 pm
You are right on point. Buying too much car is perhaps a bigger epidemic than buying too much house. The dealers want you to buy on credit as they get you on the car and interest. Salespeople can get a commission for a loan as well. To be perfectly honest I was in that category once. Being a car enthusiast, I bought a car I had no business buying. The maintenance and insurance was eating me alive so I had to change my ways. Now I still drive a “nice” BMW that I bought for $13,000. Same 50K look without the price tag.
Now when I see others doing the same thing as I once did, and call it judging but you can often tell something is off when you see a young person driving a $30-40K car. I wish I could tell them what they are getting themselves into having been in that position before.
This all comes down again to consumerism. Cars are status symbols and they always will be as long as the media portrays them that way.
But like Jeremy said, hey its America. What are you gonna do?
December 6th, 2007 at 7:13 pm
Credit card companies are bracing for defaults too. Some are doubling their projections for defaults – despite the stricter personal bankruptcy laws.
The splurge is over:
http://robertreich.blogspot.com/2007/11/after-next-recession.html
At least for now.
December 7th, 2007 at 10:23 am
I have become firmly against car loans. Shortly after I bought my first new car, I decided never again to do that either. It makes no sense. Why pay $400/mo for a car when you can just put $400/mo into your bank account? For the cost of a car, the difference between what you pay and what you earn is thousands of dollars over just a few years. Then consider you are buying a rapidly depreciating good, and when buying new it drops like a rock in value just because its been titled!
My car buying philosophy- save the money, buy used.
December 8th, 2007 at 10:38 am
‘man plans God laughs’
December 8th, 2007 at 3:03 pm
Yeah, where the heck are people getting credit and loans? I couldn’t even get Bank of America to give me a credit card and I had $30k in deposits with them (one of the many reasons I’m severing my “relationship” with them).
If car loans are the next big thing, we are deep trouble considering all the 0% and under 5% financing options that were around. as far as actually being the next big thing, I doubt it simply because the evaluation on cars and your ability to get car loans was tighter than for mortgages.
actually, americans are a little late on the spend lots on the car thing. many countries have 10 year car loans and that is what people did (like the europeans), and live in a small one room apartment.
it’s funny, when I moved to Austin, TX, for grad school, i was looking at a place to live. I went to one house that was renting out a room, there were three other couples living in the house, and they had turned every room into a bedroom. the living room was actually the entryway. The funny part was, all three couples had a brand new Volvo s60 parked out front.
when my wife and I bought a new 325i, there was another couple getting a 5 series. we were talking about price and what we were each getting. then the guy asked what our financing was, and we told them we were paying cash. it took him by surprise. that’s just the way it is with cars, the vast majority of people will finance. nothing wrong with it, so long as you can afford to do so. yes, we buy new cars because we like new cars and we keep them for a long time. there is no depreciation if you don’t sell the vehicle. yeah, yeah, we could save the money and buy used, but we are saving 90% our of income so, there’s not much for us to worry about.
December 8th, 2007 at 3:11 pm
my wife just told me about her friend who was complaining about gas costing $81 to fill her new Porsche Cayenne. She also complained about how expensive her insurance was for her and her husband. Having 1×2008 porsche cayenee, 1×2006 porsche 911, 1×2004 MB CLK320, and 1×2004 toyota camry between the two of them doesn’t help. of course, they aren’t paying any financing on any of them either.
December 10th, 2007 at 3:49 pm
The signs that car loans are a problem have been there for years. In the mid-90′s I started hearing about people having problems because they were “underwater” on their cars loans (owing more than the value of the used car). That was happening because of low down payments and long terms (5-6 years). As long as you are driving the car and making the payments, it isn’t so bad. You are getting the car you intended for the monthly payments you intended. But when you want to trade it in, or the car gets totalled in an accident, you owe money on a car that depreciated faster than you paid it off.
A few years ago, I bought a car and received some alarming news. I wasn’t able to pay for the entire cost of the used car in cash. I took a loan for a bit under half the price. The salesman was a bit apologetic about having to mention it, because he knew it wouldn’t apply to me, but he said NY State required that he mention it. There was an insurance policy available to pay off my negative equity in case the car was totalled. For the insurance industry to sell such a policy was a clear indication that there were a lot of people in that situation.
Finally, in the last few years, I’ve been regularly seeing ads for new cars that offer to pay off your existing car loan. So far, that’s nothing new. I’ve been seeing those for a long time. But recently, the fine print has been mentioning that the advertised monthly payments don’t include negative equity rolled into the new loan. Holy bankruptcy, Batman! Now, people not only owe more on their current vehicles than they are worth, they are rolling the negative equity from their previous vehicles into that loan!
December 14th, 2007 at 3:53 am
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December 15th, 2007 at 7:13 am
With a lot of Car Loans being Sub prime, I think it is only a matter of time before it does happen. In the UK, Paragon a sub prime lender is trying to sell off it’s Car loan book.
Worrying times if you need finance!
February 19th, 2008 at 3:35 am
I think you are right though – people don’t tend to default on their car payments unless they absolutely have to.As it has become a status symbol now a days. I think Today they are affordable.
March 19th, 2008 at 4:54 pm
The financial problem clouds are gathering for many people:
I found some videos on the internet around this subject, maybe you have time to look I think you will find them interesting.http://car-loans-1.com
October 25th, 2009 at 2:48 am
I have avoided this mess by never buying a car. I could function quite well without a car, preferring to walk or bike. My most expensive bike was $350, and most were under $100. The other way I avoid this mess is to pay the entire amount at the time of purchase.