Deal Pack Blog
Is there an Auto-Loan Bubble and is it Going to Burst?
Car loans have topped $1 Trillion for the first time in history. With loans being over extended and an increase in sales, some analysts are warning of an auto loan bubble. Analysts comparing it to the subprime housing loans that caused the mortgage crisis have noted one marked difference, the mortgage market was around $14 Trillion.
Although there has been a rise in delinquencies, cars are easier to repossess then a home is to foreclose. The process to foreclose a home can take up to 6 months or longer and once the lender regains possession, the property has usually lost a large chunk of value. However, defaults on a car loan can be almost immediately repossessed.
Auto dealers now have GPS tracking devices and starter interrupt devices on vehicles reminding and or requiring customers to pay in order to operate the vehicle. With these devices it allows the lender to easily track and repossess the car within days of a car loan being defaulted. With cars being easy to find, repossess and resell, the losses are being mitigated more than with mortgages.
Car sales have been on the rise, up 5.7 percent in 2015 from 2014 ($17.5 Million in Sales) and for 2016 we are on track to hit $17.8 Million in Sales. Q2 sales for used cars are up 1.8% over the previous year.
Additionally, during the month of February 32.3 % of the 1 million cars and trucks sold were leases. Vehicle leases are also on the rise and one benefit of leased vehicles is that they come back and if not, are much easier to repossess as in an Operating Lease, the collateral is fully owned by the Lessor.
The economy is not in recession, gas prices are still low (giving people more money in their pocket) and unemployment rates are stable. If anything, we may see a decline in new car sales in the next year or two. Lenders are now extending the borrowers loan term 6, 7 or even 8 years over the typical 5 years. With longer loan terms and cars lasting longer, consumers are re-entering the market at longer intervals, lessening the overall risk of a bubble.