The Auto Loan Market Is Facing a Meltdown
The record-breaking $1.3 trillion worth of auto loan debt Americans are collectively shouldering is starting to show some serious cracks. As of late last year, auto loan delinquencies were at an eight-year high, and suspiciously, that was right around the same time the number of rejected auto loan applications jumped. That's despite one of the best -- and best-paying -- job markets on record.To get more auto finance news, you can visit shine news official website.
It's anecdotal evidence of a brewing problem likely to be worsened by the coronavirus pandemic. With millions of people newly out of work and countless more adversely affected by the economic slowdown, even more car payments could start to be skipped as incomes and credit scores sink hand in hand.
That puts all lenders on notice, but could prove particularly problematic for Credit Acceptance (NASDAQ:CACC), Santander Consumer USA Holdings (NYSEC), and Ally Financial (NYSE:ALLY), each of which relies heavily on auto lending.A superficial look at the global economy as of last year was encouraging. In retrospect, though, things may not have been as strong as they seemed. The American Bankers Association reported in January that, as of the end of the fourth quarter of last year, 2.43% of auto loan recipients were at least 30 days late on their payments. That's the highest rate since 2011 when most consumers were digging their way out of 2008's economic implosion.
Lenders responded by tightening their purse strings. The New York Federal Reserve noted by the middle of last year that rejection rates for car loan applications had soared, up from 4.5% in October of 2018 to 8.1% as of October of 2019.
Consumers haven't exactly been helping themselves. Automobile market data outfit Edmunds noted that as of March -- for the first time ever -- the average term of a car loan exceeded 70 months. That's 5.8 years, and it makes it likely most loans will be "upside-down" for much of that 70-month stretch, meaning the owner will owe more than the then-used vehicle is worth. They're paying a fortune for those vehicles too, with more than $34,000 typically being financed to buy a new vehicle last month. That's another record that has led to record-breaking average monthly payments.
If all this news rings familiar, there's a reason. Though it's not as dramatic as the real estate frenzy from 2008, the underpinnings of what turned into the subprime mortgage crisis are the same. The COVID-19 outbreak may be what pops the bubble -- if it hasn't already.