The Next Financial Bubble? Auto Loans Soar as Delinquencies Rise
Business + Economy

The Next Financial Bubble? Auto Loans Soar as Delinquencies Rise

© Carlos Barria / Reuters

America’s love affair with the automobile may be reaching dangerous new heights.

In its quarterly report on household and consumer debt, the Federal Reserve Bank of New York says outstanding auto loans now total $1.16 trillion, with an increase of $93 billion in 2016 alone. At the same time, delinquency rates on auto loans are on the rise, with 3.8 percent of payments more than 90 days late – or “seriously delinquent” in Fedspeak -- as of Dec. 31, 2016.

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That is stoking fears of a bubble. An American Banker story late last year pointed out that “subprime loans were the fastest-growing segment of the loan market” in 2016 – and the New York Fed says new auto loans last year were at their highest point in the 18 years it has been tracking them.

“In the past two years,” according to Bloomberg, “U.S. drivers with credit scores of less than 620 borrowed $244 billion to buy cars, a tally not matched since 2006 and 2007 when the same strata of buyers rolled off with $254 billion in auto loans.”

And as Quartz points out, car loans in 2016 rose “9% from the previous year and 13% above the pre-crisis peak in 2005, in inflation-adjusted terms. The number of cars and trucks on the road, meanwhile, rose by only 1.5%” in the same period. Quartz suggests that with credit cheap, lenders might be allowing car buyers to borrow more than they can afford.

In addition, lowering standards and stretching out repayment times may be letting consumers buy cars and SUVs that may be out of their budget range.

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The good news in all that, if there is any, is that a car is a lot easier to walk away from – or repossess --than a house.