As household borrowing levels surpassed pre-recession numbers seen in 2008, 2016 was a record-breaking year for debt accumulationThis time around consumer debt is not focused on the housing market:Consumers have concentrated borrowing for educational purposes in the form of student loan debt, rising credit card balances, and the purchase of expensive vehicles. Auto loan debt increased by 22 billion dollars in the last three months of 2016, topping 1.1 trillion in total indebtedness.
Economists view increased spending, and, even debt accumulation, as a sign of consumer confidence. However, there are striking similarities to lending practices seen just prior to the housing market crash of 2007 which spurred a recession that lasted for close to two years.
Similarities of Borrowing and Lending Patterns in The Housing and Auto Industries
Before the crash of 2007, home lenders offered low or no down payment home loans to borrowers with poor credit and unreliable track records. No document or stated income and asset loans became commonplace. The practice of encouraging borrowers to overbuy homes through negative amortization and interest only loans failed to reduce loan balances over time, leaving homeowners owing more than the house was worth when values fell.
Today, auto lenders are following a similar pattern: They are increasing the number of loans to those with poor credit and charging high fees and high interest on the collateralized loan, leaving borrowers owing more than the vehicle is worth. With dealers offering loans through specialized auto finance companies targeting those with subprime credit scores shrinking down payments and more lenient lending practices are now commonplace..
The subprime market within the auto industry grew from 5.1% of total originated loans in 2010 to 32.5% at the close of 2016. With outstanding loan balances, north of 1.1 trillion, the increased risk of loan defaults in mass numbers would have a direct economic impact:Subprime borrowers currently account for an estimated 20% of all new auto loans and 25% of total outstanding balances. These borrowers also pay the highest level of fees and can experience 20% or higher interest rates, despite the collateralized loan.Vehicle loans can extend to 84 months or seven years, creating a financial trap for millions of borrowers who are unable to refinance, sell, or get out of the loan because they owe more than the vehicle’s retail value.By the end of 2016, auto loan defaults rose to 12%, bringing additional scrutiny to auto industry lending practices. In an effort to increase profits, finance companies specializing in auto loans, have reverted to similar practices seen in the mortgage industry pre-2007.
More than any single industry outside of the housing market, the auto industry drives much of economic growth of the country and accounts for an estimated 20% of overall retail spending or 3% of the US Gross Domestic Product (GDP). An industry collapse would have a significant impact on the overall economy.Mass repossessions would flood the market with used cars, driving down prices of pre-owned vehicles and reducing the attractiveness of new models coming to market.
How Easier Lending Practices in The Auto Industry ImpactsYou:
Easier to get a loan. Looser lending practices make it easier to upgrade your vehicle orbuy a newer model.. Most buyers with asteady income can qualify for an auto loan with little regard to affordability. You can extend the loan for additional years to lower the monthly payment or purchase a slightly older vehicle to make the numbers work.However,Just because you can get into a newer vehicle when you have poor credit, does not mean you should. Subprime loans come with thousands of dollars in additional fees, required gap insurance, GPS installation, and high interest often 20% or higher. These conditions put you upside down on the car immediately and will not correct itself over time. The result is: you overpay for a vehicle. Sometimes you can pay cash for an older model car for the amount the lender requires asa down payment. You would eliminate the need for a car payment, and give you time to address the financial issues causing your poor credit.Poor financing terms can leave you paying twice as much to drive the newer car.
Credit is the key to better terms. Lenders use credit scores and your credit file as the primary basis for the loan terms offered. The better your credit score, the lower rate, lower down payment, and lower fees you can secure. Before applying for an auto loan, review your credit score and report and take steps to correct the derogatory information.
Think long term. In our instant gratification society, thinking three to seven years down the road can feel like a lifetime. However, signing the paperwork for a bad loan leaves you with few options if you change your mind. Consider how long it will take to pay debt down or make a year’s worth of on-time payments.. Can you repair your existing transportation and delay the purchase for another year or more until finances improve?
Take stock of all your options before agreeing to a deal that will cost you more money and could do more damage to your credit, if the purchase ends up as a repossession.
If you are burdened with high amounts of credit card debt and are struggling to make your payments, or you’re just not seeing your balances go down, call Timberline Financial today for a FREE financial analysis. Our team of highly skilled professionals will evaluate your current situation to see if you may qualify for one of our debt relief programs. You don’t have to struggle with high-interest credit card debt any longer. Call (855) 250-8329 or get in touch with us by sending a message through our website.