As we have written many times, (most recently see: A word on booking car ‘sales’ without consumers‘) the sales-focused trend to longer and longer car loans is dumb for many reasons, but chiefly because it means more buyers are stretching to take on cars they can’t afford on conventional terms which makes for greater financial risk for them and their lenders. Today a whopping 73% of subprime vehicle loans now exceed 5 years up from 64% during the first 3 months of 2014.
This means that buyers will be paying the loans off for several years longer than the old norm of 3 or 4 years. In other words, they will not be able to easily buy a new car in 3 or 4 years as they once did, and therefore car cos have effectively brought forward and booked today what would have been future sales revenues for them 3 or 4 years from now. (That’s what all these ‘bring demand forward’ schemes achieve…you fill in the hole in front of you by digging another 2 steps in front, and suddenly you haven’t solved the hole just moved it forward a little bit–but you do look busy for a while!) Meanwhile your production continues to overshoot and your unsold inventories mount.
But yet another problem in all of this, is that manufacturer warranties typically expire within 3 to 4 years, or sooner if mileage limits are reached, and research shows owners typically stop paying their car loans when their cars stop working. Thanks to extra long terms, the chances of vehicles breaking down now before the loan is repaid are significant. See, Longer Leash for subprime car buyers in US stokes debt concerns:
“Everyone has used the argument that borrowers pay car loans because they have to get to work,” said Anup Agarwal, a money manager who oversees $65 billion at Western Asset Management Co. and hasn’t bought a subprime auto bond in a year and a half. “But borrowers only pay loans if the car is working. We have not seen this cycle come through yet.”
Of course foolish loan terms are only possible thanks to the risk-pushing finance sector and yield-desperate investors, aided and abetted by a zero-bound Fed and industry-captured regulators. The subprime housing bomb that blew up the US (and then the rest of the world economy in 2008), has been replicated again this cycle in housing as well as corporate debt, student loans and auto finance. Oh what fun:
Demand for automobile debt in the U.S. is enabling lenders to make longer loans to people with spotty credit, stoking concern that car shoppers are being lulled into debt loads they won’t be able to sustain…
Loans as long as seven years are increasingly being put into more bonds as auto-finance companies and Wall Street banks sell the securities at the fastest pace since 2007.
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