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"Used Car Retailer And Subprime Auto Lender
Collapse As Car Loan Crisis Intensify"
by Epic Economist
"In the past, America has seen a massive stock market and housing bubble burst – but a car market bubble burst? That’s new. And yes, it seems absurd but that’s what is happening right now. According to Bloomberg, the dominoes are already starting to fall. A few weeks ago, we discussed the “perfect storm” that was brewing for the U.S. auto market. Fitch data revealed that today more Americans can’t afford their car payments than during the peak of the Great Recession. But that wasn’t exactly a surprise, after all, with the highest interest rates in 15 years, auto loans became too expensive for millions of struggling Americans.
Yesterday Bloomberg exposed that the calm before the storm was actually briefer than we all thought. That’s because on Friday, one of the most famous used car retailers in the United States and subprime auto lender, American Car Center, suddenly shut down all of its operations, closing all of its 50 dealerships across 10 states.
The abrupt collapse of the auto lender and car retailer was likely the first of many and highlights the deteriorating state of the subprime auto loan market. Millions of people are starting to fall behind on their car payments, and the distress cycle is rapidly accelerating.
According to Cox Automotive, 7.11% of subprime loans were severely delinquent in the last month, up from 6.75% in the month prior and from 5.48% in the same period a year ago. Even more concerning, the 7.11% severe delinquency rate was the highest monthly figure since Cox began tracking the data in 2006. A seriously delinquent auto loan means the borrower is more than 90 days behind on payments.
On top of that, IBIS World data shows that about US$19.6 billion of subprime auto loans are expected to be written in the U.S. in 2023. This amount represents only about 11% of the overall U.S. auto market of US$173.2 billion, but the sharp increase in delinquencies among the riskiest auto borrowers could very well be a leading indicator of broader auto loan problems and pose a threat to the overall economy.
Even though the idea of a car market bubble seems quite absurd, as opposed to a stock or housing bubble. That’s the perfect way to define what this is. Encouraged by easy credit conditions, Americans have borrowed huge amounts of money for their cars over the past two decades. At the turn of the millennium, Americans had less than $600 billion in motor-vehicle loans outstanding, according to the Federal Reserve Bank of St. Louis. By the end of 2022, Americans owed just shy of $1.4 trillion on car debt, a full doubling in barely a decade. People have been borrowing more money per vehicle — from about $26,000 in 2010 to $$40,155 in January — an exponential spike!
However, interest rates for auto loans have gone from 7.4 percent to 9 percent in a year, and monthly payments from $506 to $600. Seven-year loans are gaining in popularity. But not everyone can shoulder the higher monthly payments, as well as higher down payments, so car sales, and car prices, are crashing.
The truth is that auto loans have long been what people in the industry call “a shitshow.” When lenders face a day of reckoning for all of these bad loans, shockwaves will ripple through financial markets and panic will ensue. Now it’s understandable why Tesla CEO said the auto loan crisis would trigger “the biggest financial crisis ever”. The outlook is looking gloomier by the day, and now we’re waiting to see the next domino to fall."
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