Your Driveway Could Be The Source Of The Next Financial Crisis

A dealership upsell begins to look dangerous with late payments on the rise.

American drivers are increasingly riding in style as a crop of seductive vehicles that are faster, smarter, and more efficient than ever before lures customers along with low interest rates and low gas prices. However, though—those swanky machines are heavily leveraged, don’t be fooled by the curb appeal.

According to the Federal Reserve Bank of New York, a rush of year-end car shopping pushed vehicle loans to a dubious peak of $1.16 trillion and saw the country’s auto debt hit a record in the fourth quarter of 2016. Stretching from Subarus in Maine to Teslas in San Francisco is the combination of new car smell and new credit woes.

Big enough to incite talk of a bubble is the number which is so alarming. The cost of 43.4 million Ford F-150 pickups, one for every eight or so people in the country is covered by the pile of debt. About $6,100 in car payments on the average is owed by every licensed driver in the U.S.

But the market for houses is far different than the market for cars. One of the major differences is that vehicles are far easier to repossess and resell and therefore a much more fluid asset. Moreover, when it comes time to prioritize bills, the auto loan typically takes precedent over other things for people because car payments tend to be cheaper than mortgages and people tend to use their vehicles a lot.

Compared to late payments on student loan debt and credit card balances, delinquencies on vehicle loans, though rising, are still lower. And hence the panic button about car payments should not yet be pre4ssed by preppers getting ready for global economic collapse.

But just like executives at the big automakers, they should worry. The manufacturers are the ones loaning money to the riskiest buyers barring a few finance start-ups. They have more incentive to make money on both the loan and the product, if all works out right.

Recently, SUVs and trucks, which tend to carry higher profit margins and cost a little more as well compared to vanilla sedans, are being focused to be moved more by carmakers. With 17.55 million vehicle sales in all last year, business has been pushed to record levels by the lowering of credit standards by a bit and stretching repayment windows up to six or seven years.

However a record of not handling their finances particularly well by a large number of these drivers is one of the problems. While underwriting three-quarters of the loans and credits going to subprime vehicle buyers, car companies—and their captive finance units—make about half of all car loans these days. And the first companies that will feel rising delinquencies would be these. While bank and credit unions have actually seen an improvement in late payment data, the Fed says recent delinquencies are inordinately hitting carmakers.

Therefore dealers have more in common with the buyer than one might think: both may be paying for it later every time a dealer upsells someone into swanky SUV.

(Adapted from Bloomberg)

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