Deal Pack Blog

Is There Really A Subprime Auto Loan Bubble Forming?

Some analysts have taken the recent rise in subprime auto lending to mean that an impending bubble burst is forming similar to the mortgage bubble burst that kicked off the recent financial recession. The issue with their thinking is that they are comparing apples to apples when they should be comparing apples to bananas.

 

The value of mortgages leading up to December 2007 topped $14 trillion dollars while the current balance of outstanding auto loan debt hasn’t yet reached even $1 trillion dollars and even at the height of the mortgage crisis, auto loans were still performing well. Mortgages are backed by the assumption that the asset (the home) will appreciate in value over time whereas auto loans are backed by depreciating assets. This means that nobody is expecting the value of these loans to skyrocket as they did with mortgage based securities.

 

Another aspect that these analysts aren’t taking into consideration is that debtors are more inclined to make their car payment than their credit card and other revolving and installment debt. This is because people need their cars in order to get to work and pay all of their other bills.

 

One more bit of information to consider is that while the numbers of auto loans to deep subprime and subprime borrowers has risen by 5.60% and 3.84% respectively, the number of loans to super-prime borrowers also rose by nearly 8% showing that this growth is not just in the subprime sector. This, coupled with the fact that delinquencies have remained fairly steady compared to this point last year (30 day delinquencies rose from 2.61% to 2.62%, 60 day delinquencies fell from 0.73% to 0.72%) has industry insiders rebuking the claims made by Wall Street.

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