There Might Be A Bubble Waiting To Burst In Your Driveway

What a splendid time it is in America. Interest rates are low, Gas prices seem to be staying manageable, and automakers are pumping out new cars that are sleek, fuel efficient and smarter.

Before fawning over the sweet ride in your neighbor’s driveway keep in mind that these vehicles are leveraged beyond belief.

The U.S. auto debt hit another record high at the end of 2016, according to the New York branch of the Federal Reserve, to a new peak of $1.16 trillion.

Yes, that was trillion with a “T, ” and yes, it is starting some talk of the next financial bubble.

The automobile market is different from the housing market. First off, vehicles are more fluid- they are easier to buy and sell. Also, the payments are cheaper, and since cars are used a lot, the car bill takes first place over the mortgage payment.

Vehicle payment delinquencies are rising, but are still lower that student loans and credit cards. So, it might not be time to expect global collapse to come from car payments yet.

However, that does not mean there is no room for concern. Manufacturers are the ones who lend directly to the riskiest buyers. They have been lowering their standards and pushing out repayment windows up to 7 years.

The statistics show that car buyers with credit scores under 620 have an outstanding car bill of a combined $244 billion.

The issue is that historically, people with low credit scores usually do not handle credit well and tend to become delinquent or even default on their loans.

Automobile manufacturers underwrite three-quarters of the loans to subprime buyers. As a result, when delinquencies go up, they feel it first.

So, the bottom line is that when the dealer pushes a buyer into an upsized SUV, they are about to find themselves on the same road as the purchaser. It seems they might both be paying the price at the end of the day.

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