Auto Loans: Another Mess In The Making?

auto car sales dealer cars dealers keys

American car debt is a lot like risky home and credit card loans. Lured by juicy financing offers, people buy beyond their means.

See all those Lexus, BMW and Benz late-models in your neighbours’ driveways? Your neighbours don’t really own them.

Americans owe an average of $12,560 per car (all models).  All told, this adds up to about $1 trillion.

Let’s be clear: this is far less than the average national mortgage debt per borrower of $193,811 (although more than the average credit card debt of $5,719). 

As we’ll get to, a 1 per cent default rate on $1 trillion isn’t that bad. But car debt is another piece of American debt that ripples through the economy if it goes bad, and it’s not getting much attention.

At least a long-time corporate finance officer James Quinn doesn’t see this ending well.

Minyanville: According to the Federal Reserve, consumer non-revolving debt grew to $1.6 trillion today from $300 billion in 1980. About $1 trillion of this is auto loans.

The average automobile loan today is for 63 months, with some going as high as 84 months — compared with an average of less than 48 months in the early 1990s.

In 1997, banks financed an average 89% of a new vehicle’s price. The average loan amount was $17,000. In 2007, banks financed 101% of a new vehicle’s price (because consumers borrowed to cover the amount they were upside down on their trade-in). The average loan amount is now $29,000. A full 40% of all trade-ins involve upside-down car loans.

Quinn also calls out Wall Street for securitizing the loans.

The black magic of securitization has allowed banks and finance companies to bestow credit cards, and car loans to high school dropouts that make $20,000 per year in West Philly, with no concern about getting repaid. They packaged this future bad debt, paid off Moody’s and S&P to rate it AAA, and dumped it on suckers throughout the world.

Now, auto loan delinquency rates are at all-time highs — 1.7 million cars were repossessed in 2008, with another 2 million likely to be repossessed in 2009.

Quinn’s argument of worsening auto debt is backed-up by recent auto-loan delinquency projections from TransUnion, although the figures aren’t terrifying:

…the national 60-day auto delinquency rate will rise to almost 0.90 per cent by year-end, which is a 4.65 per cent increase over the prior year…Although the effects of the government’s various stimulus programs seem popular and the auto industry is reporting sales increases or a levelling-off of losses, the weak labour market should continue to negatively impact the consumer into 2010. Additionally, with the recent federal government funded ‘clunkers’ program, there is a good possibility that average auto debt will increase in the second half of the year, as new and higher auto loan amounts start showing up on consumer credit files.

Here’s TransUnion’s chart of recent delinquency rates. The national 60-day auto delinquency rate (the ratio of auto loan borrowers 60 or more days past due) dropped between the first and second quarters of 2009 (0.83 per cent to 0.73 per cent). However, the year-over-year delinquency rate at the national level increased 7.35 per cent in the second quarter:

auto loan deliquincy chart

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