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"It's Not Just A Car Loan Crisis:
This Is A Perfect Storm!"
by Epic Economist
"What happens in the U.S. auto sector is usually seen by economists and financial advisers as a presage to what will happen in the U.S. economy, and we have to admit that conditions are getting critical right now. Several key datasets are pointing to an ominous inflection point and a crushing auto loan crisis as consumers can’t afford their car payments and the rate of repossessions continues to rise. Experts say this is also an indication that a full-blown recession is near, and that U.S. drivers should brace for a turbulent 2023, with interest rates expected to soar even higher and souring credit conditions at major lending institutions.
Americans are using unprecedented amounts of debt to fund record car prices. Numbers released in December showed a dramatic spike in the number of new car loans, with the average loan increasing by more than $2,000 in a single quarter, from just over $38,000 (a record), to $40,155 (a new record).
Evidently, the reason why new car loans have hit record highs is simply that new car prices have also soared to all-time highs. But the discussion of whether record new car prices are the result of easy record credit, or whether record new car loans are simply following the explosive surge in car prices, seems irrelevant at this point. Instead, let’s focus on something even more alarming: the massive surge in the average interest rate on new 60-month auto loans. According to Bankrate, as of January 27, the rate was just over 6.67%, almost doubling since the start of 2022, and the highest in 12 years.
“It is this surge in nominal auto debt as well as the unprecedented spike in new auto loan rates, that we believe has finally pushed the US car sector to the infamous Wile Coyote point of no return,” wrote financial analysts with ZeroHedge.
Less than a month ago, citing an NBC report, the analysts noted that a soaring number of consumers were falling behind on their car payments. “A trend which will only accelerate in 2023 -- in a sign of the strain soaring car prices and prolonged inflation are having on household budgets,” they wrote. And it looks like their predictions are spot on.
Things have escalated so quickly that today, more Americans are falling behind on their car payments than during the financial crisis, Fitch reports. This month, the percentage of subprime auto borrowers who were at least 60 days late on their bills rose to 5.67%, up from a seven-year low of 2.58% in April 2021. That compares to 5.04% in January 2009, the peak during the Great Recession.
Consequently, the number of car repossessions is rapidly climbing all over the nation. Auto auction company Manheim reveals that the rate of repossessed cars increased 11% in 2022 compared to the prior year, -- “it is still rising fast, and unless something major changes, it will soon overtake most recessionary benchmarks,” the analysts highlighted.
Moreover, credit conditions are souring at major lending institutions as banks brace for soaring delinquencies, defaults, and catastrophic writedowns. New loan originations have also collapsed, not only because of higher loan standards but because most Americans suddenly realize they can't afford monthly payments at the current rates. A tidal wave of delinquencies is on the horizon, and banking institutions are already preparing for the worst. The implosion of the U.S. auto sector is coming, and it is going to be spectacular."
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