The Auto Loan Bubble

[David in MN]

Coming from the Mortgage Deduction thread, I'm starting an auto loan bubble thread.

The details...

Auto loans are now lasting upwards of 8 years. That means a vehicle is frequently underwater for 4/5 years! Yikes. The solution has been to roll the loan from the previous vehicle into the next one. So instead of buying a new car for $30k people are buying a $30k car for $40k including $10k leftover from the previous car.

It's worrisome.

In its recent call GM admitted to over 100 days of supply. For those who don't know the industry 60 days of supply is pretty normal. 100 days is disaster. In short, GM isn't selling new cars.

Love to hear others' thoughts.

[Carl]

  I have owned many autos in my life,but none of them owned me....I have NEVER owned a new auto,even my current car is a 2005 .

[Smurf Hunter]

I just rolled 33 miles on Tuesday (pardon the computer science joke):


I don't drive a lot.  Got that car used w/ 88k, and it took me 18 months to drive another 12k.  The previous owner was a grandmother who dutifully kept service records and swore she never got to 80mph.
Sorry GM, but I'm not in the market for a long while...
And last night outside a convenience store, some sketchy middle easterners asked me how much I wanted to sell it for.

If you have a clue, and aren't completely superficial you will realize that even lower end modern cars can last a considerably long time.  If you take care of a Corolla or Civic, it'll happily run 250K and more.
It will look rough and have outdated technology gizmos, but will continue to get you places.

With so many viable options, I cannot understand why someone would kick their own butt financing a car they couldn't really afford.

[Smurf Hunter]

Coming from the Mortgage Deduction thread, I'm starting an auto loan bubble thread.

The details...

Auto loans are now lasting upwards of 8 years. That means a vehicle is frequently underwater for 4/5 years! Yikes. The solution has been to roll the loan from the previous vehicle into the next one. So instead of buying a new car for $30k people are buying a $30k car for $40k including $10k leftover from the previous car.

It's worrisome.

In its recent call GM admitted to over 100 days of supply. For those who don't know the industry 60 days of supply is pretty normal. 100 days is disaster. In short, GM isn't selling new cars.

Love to hear others' thoughts.

Less about me, and more to your OP, this is a feedback cycle.

If you follow this to the logical conclusion,  if a car is sold at year 5 of an 8 year loan, and the balance rolled onto the next car, and so forth - this is obviously over leveraged.
That's a mini-financing crisis waiting to burst.

It will be interesting to see what this does to the price of slightly used cars.

We all know the adage of the new $30K car that loses $5K the day it's driven off the lot.  Would that margin increase or decrease?  If less people have access to financing, that should drive DOWN the cost, but perhaps I'm missing some details. If that happens, car manufacturers would be in deeper trouble, as they would get tertiary competition from used vehicles.

It's easy to rationalize paying $30K for new when a used one is $25K, but when the lightly used price drops considerably...

[David in MN]

I'm partially interested in this because I'm planning on buying a car. I've more or less set on a Ford Explorer and now it's just a matter of time to find the right one at the right price. My 2 door VW was great prior to having a baby. I'm secretly hoping prices drop as time progresses.

New cars are in a big slump. And the lending is a bad debt bubble. What could happen is a default on loans that are underwater and a flooding of the used market. Like 2008 but in cars. It's hard to know what is causing this. Is the economy weaker than metrics suggest? Are our cars just lasting longer?

As I've gotten serious and connected with a local salesman to work with, one of the questions he asked was pricing and financing. From what we've seen I knew I'm in the $20-$25k region and promptly said I'd pay cash unless financing offered a lower price and wait until the term was up and pay it off in full. He looked at me like I had a foot growing out of my head and told me nobody does that. I paid cash for the VW. The only reason we financed my wife's car was for a better price. I hope I'm not that unusual.

Toyota, Honda, and Ford seem to be the winners right now. GM feels like the big loser. But if everybody's buying cars on 8 year loans leveraged to the hilt, it can't be good in the long run. And even being the best house on a bad block isn't good.

If you haven't been auto shopping in a while, you'd be amazed at the gizmos crammed into cars to drive up the price. Steering wheels look like video game controllers. Backup cameras. Other car detectors. Bluetooth everything. If the auto consumer is over-debted, why aren't we buying simpler cars?

[Smurf Hunter]

If you haven't been auto shopping in a while, you'd be amazed at the gizmos crammed into cars to drive up the price. Steering wheels look like video game controllers. Backup cameras. Other car detectors. Bluetooth everything. If the auto consumer is over-debted, why aren't we buying simpler cars?

I understand it's partially generational.  One reason my 2006 was considerably cheaper than the newer generation model, was the lack of technology.  I have a good stereo, 5.1 even, but no bluetooth audio input.  The hands free phone is passable, but awkward.  The car runs fantastic and it had more tech. than the vehicle I replaced, so I didn't care.

In contrast, I recently rented a KIA Soul (new price $17K) and I must say the mobile phone setup and integration was slick. I followed 2-3 prompts and it was streaming music from my phone to the car audio, and could verbally operate basic phone functions like "call home".  There was also color adjustable accent lighting.  It drove well enough, but was uninspiring above parking lot speeds. It was a novelty to drive for a few days, but I cannot understand any grown adult wanting such nonsense...

Most 20-somethings cannot tell you how many cylinders their engine has, or even if it's front or rear wheel drive.
That stuff was a right of passage when I was younger, but times must be changing.

[Alan Georges]

Most 20-somethings cannot tell you how many cylinders their engine has, or even if it's front or rear wheel drive.
That stuff was a right of passage when I was younger, but times must be changing.

Funny that you bring this up, this was linked from LewRockwell.com today:
https://www.ericpetersautos.com/2017/09/05/kids-dont-wrench/
He bats around how things have changed, both the cars and the people.

[FreeLancer]

What's the collective wisdom on how much car the prudent buyer can actually afford these days, as a percentage of monthly income?

[Smurf Hunter]

What's the collective wisdom on how much car the prudent buyer can actually afford these days, as a percentage of monthly income?

There is no consensus on that metric for housing costs, so I'd be surprised if there's anything close to standard for car payments

[David in MN]

What's the collective wisdom on how much car the prudent buyer can actually afford these days, as a percentage of monthly income?

It's a metric that's hard to measure. It would have to be pro-rated based on income, number of kids, miles driven, rough terrain, unique needs, job requirements, etc.

There are some basic concepts, though. Using me as an example... I drive 1-2k miles in a year. That's it. So I'm a fool to buy a new car and let it rust out. Instead I look for a used car with 40k miles on it already (70k is even more ideal but harder to find) because it will fall apart before I "drive it into the ground". My wife barely puts on more than me as work is about 15 minutes away. With one kid we kind of know what our buying strategy is.

Bottom line is that every buyer is unique. Guidance is hard. Hardliners like my father would say you "don't go into debt on a depreciating asset".

[osubuckeye4]

Coming from the Mortgage Deduction thread, I'm starting an auto loan bubble thread.

The details...

Auto loans are now lasting upwards of 8 years. That means a vehicle is frequently underwater for 4/5 years! Yikes. The solution has been to roll the loan from the previous vehicle into the next one. So instead of buying a new car for $30k people are buying a $30k car for $40k including $10k leftover from the previous car.

It's worrisome.

In its recent call GM admitted to over 100 days of supply. For those who don't know the industry 60 days of supply is pretty normal. 100 days is disaster. In short, GM isn't selling new cars.

Love to hear others' thoughts.

One of my good friends is the general manager for a large car dealership in the area and he said that 8 years is not the end point, it's just a blip in a progression that has been going on for about a decade now.

If sales continue to slump, they are going to go 108 or possibly even 120.



This touches on a much larger problem... stagnant wages, escalating prices, and people meeting those increased prices through debt which is being extended out further and further to get minimum payments down to appear more appealing.

Part of it is a lack of financial literacy, and part of it is this insane sense of entitlement that a growing portion of people have.



So many people these days go to an auto dealership with two thoughts in their head: 1) I deserve this, 2) I can afford "x" per month.

They don't go into the dealership looking at the overall amount being financed... they go in looking at what the monthly payment will end up being.

You can quote them $37,500 for a new car and tell then it's $600/month for a standard 60 month financing agreement and they will freak out... but if you tell them, "it's only $325/month for 120 months", all of a sudden their eyes light up because they can "afford" $325 per month.

As I said in the other thread, this is all going to end very poorly. Not just because of autos... because just about everything is playing out in the same fashion. Household appliances with 0% financing for 24-36 months, homes being purchased with $0 down or 3% down and crazy PMI payments, auto loans with low interest rates stretched out a decade, credit cards offering 0% APR for 18-24 months, then 17% after the introductory term expires, student loans are a complete disaster at the moment.... it's everywhere/

There is really no other way that it can play out other than one of the many bubbles bursting and the system crashing. The question is when it implodes and which of the number of possible catalysts set it off, not if.

[RitaRose1945]

Part of it is a lack of financial literacy, and part of it is this insane sense of entitlement that a growing portion of people have.

So many people these days go to an auto dealership with two thoughts in their head: 1) I deserve this, 2) I can afford "x" per month.

They don't go into the dealership looking at the overall amount being financed... they go in looking at what the monthly payment will end up being.

You can quote them $37,500 for a new car and tell then it's $600/month for a standard 60 month financing agreement and they will freak out... but if you tell them, "it's only $325/month for 120 months", all of a sudden their eyes light up because they can "afford" $325 per month.

I have a friend like this.  Like me, she was making $21 per hour with almost unlimited overtime at $32 an hour.  We both got laid off, and she took a job making $10 an hour (no benefits) with her church because "God put it there in front of me, so obviously that's what he wants me to do."  Unfortunately, her husband disagreed and was hoping she would make a little more than that since they have a whole bunch of kids that are all going to college.  She's still paying a boatload for her degree, but can't earn anything with it because she still has four classes left before she can actually get it, but she can't afford to take the classes because she can't save up, finances everything, and has to have everything special.  I was stunned when I saw her buy $25 eye liner (I pay $3.50) because "it's really good."  She believed she should have it because she worked hard and so she deserved it.

Where we worked, you could drive a Chevy Colorado or a Silverado, and she always got pissed off if she got a Colorado.  She felt she should have it because she wanted it, even if she struggled just to to get in because she's only 5 feet tall, and if it meant some of the guys who were over 6 feet tall had to use the smaller Colorado.  It was incredibly selfish and entitled.

We are no longer friends, since this was her attitude about life in general.  But she's not alone.  There are SO many people out there who basically "want what they want" and feel they work 40 hours a week, so they deserve it.  They fail to see that one of the main reasons why they're stuck in a job they hate is because they have so much debt that they can't leave and do something else.  They're trapped by the escape mechanism they're using to feel better about their lives, when they could be using that money to actually improve their lives.

Jay is AWESOME to go car shopping with.  He will bargain down to the last dollar, even when I'm ready to settle.  He argued one item that seemed small to me.  I said, "It's only $7 per month."  He replied, "Yeah, but that's $420 I'm arguing about."  Good point.  And he caught a fee that I never should have been charged, which is the fee to etch the VIN on the vehicle.  I was buying a used car, so that had already been done and charged when it was new.

[RitaRose1945]

  I have owned many autos in my life,but none of them owned me....I have NEVER owned a new auto,even my current car is a 2005 .

I have owned one and only one new car, and that was a 1995 Blazer.  My ex, back when we were together, bought it for me to drive when my other car broke down.  We both had crappy credit, he paid more than he should have for it, and it was when interest rates were high anyway.  So we were paying something like 18% interest and $598 per month back more than 20 years ago.  Then the transmission failed at about 70,000 miles, which is apparently what 1995 Blazers do around that mileage.  We barely had it paid off.  I vowed never again.

[David in MN]

If sales continue to slump, they are going to go 108 or possibly even 120.

10 year loans for cars with the previous car rolled in?  Such a thought would never occur to me. With interest that's like owing $60k on a $25k car about to depreciate $5k when you turn the key. That's not just unsustainable. That's catastrophic.

[Carl]

10 year loans for cars with the previous car rolled in?  Such a thought would never occur to me. With interest that's like owing $60k on a $25k car about to depreciate $5k when you turn the key. That's not just unsustainable. That's catastrophic.

They better get ready to live in that.

[RitaRose1945]

10 year loans for cars with the previous car rolled in?  Such a thought would never occur to me. With interest that's like owing $60k on a $25k car about to depreciate $5k when you turn the key. That's not just unsustainable. That's catastrophic.

Absolutely.  But that's not how the average person views it.  They still look at the monthly payments, not the total, so they feel like it's affordable.

Sad thing is, these are the same types that don't do regular maintenance or get gap insurance, so the car likely won't even be driveable when they still have payments left to make.

Which means they'll probably default on the loan with a year or two left, and their credit rating will go down, and they'll pay even higher interest on the next car.

Lather, rinse, repeat.

[FreeLancer]

Bottom line is that every buyer is unique. Guidance is hard. Hardliners like my father would say you "don't go into debt on a depreciating asset".

I guess that would make me a hardliner, then. 

We have purchased 4 cars in 25 years, 2 used, 1 with a 2-yr note, but none in the last 10, so I'm kind of out of touch with the car market.  I got the distinct impression the last time that my local Toyota dealer found a cash buyer like me to be much more work than it was worth, and they still insisted on a credit check in order to let me drive it home before my check cleared.

[David in MN]

I guess that would make me a hardliner, then. 

We have purchased 4 cars in 25 years, 2 used, 1 with a 2-yr note, but none in the last 10, so I'm kind of out of touch with the car market.  I got the distinct impression the last time that my local Toyota dealer found a cash buyer like me to be much more work than it was worth, and they still insisted on a credit check in order to let me drive it home before my check cleared.

When I bought my VW for $10,500 the dealer insisted on a bank check after refusing a credit card, a personal check, and Bitcoin. The process of buying a car outright is agonizing but they'll throw a loan at anybody. He already had a photocopy of my ID and my phone number. I understand the credit card but refusing a check after all that? Especially for a car that should be a rounding error at a volume dealer.

One must wonder how much of the business financing is. Why else would you hassle the cash customer?

[osubuckeye4]

Absolutely.  But that's not how the average person views it.  They still look at the monthly payments, not the total, so they feel like it's affordable.

That's exactly where the issue stems from.

People don't go into the dealership saying, "I can afford to take on $25,000 worth of debt at this point in time".

They go in saying, "I can currently afford to pay $400/month, what will that get me?"


They then walk out with $40,000 worth of debt to pay off... stretched out over 8 years, with a ton of interest tacked on.

Where it compounds is that they don't plan for all the things that are going to happen over those 8 years. Appliances are going to break, kids are going to come into the picture, unemployment might occur for a period of time, increased taxes, medical expenses, etc.

It's all about that single moment when the purchase is being made... and how far they can leverage themselves at that snapshot moment in time.

The only way any of this works out in the long run, is if wages skyrocket... and that seems unlikely.

[bigbear]

The old rule of thumb is 10% of take home pay to car payments.  But new car prices are higher, to make the 10% you either have to put more down or stretch it out.  But the more discretionary income you have to play with, the more per paycheck you can put toward a car payment.  Which brings us to OSU's point about stagnant wages (or inflated away wages)...

That's counter balanced a little when you consider that the vast majority of today's cars can easily get 150k+.  250k with little beyond normal maintenance is much more frequent than it once was.  For most people, that's a 10-15 lifespan (considering most cars are driven between 10-15k a year).  And the mileage tends to get longer with bigger engine trucks (diesel 350's seem like they can last forever). 

Cash for clunkers may play into it a bit as well.  It accelerated junking used cars and buying new ones. 

Seems like leases are trending down.  Perhaps people are realizing the lease rules can be costly.(http://www.autonews.com/article/20170823/PRESS_RELEASES/170829902/swapalease.com-unveils-quarterly-auto-lease-trends-report-for-q2-2017)

Finally, GM has a pension problem and an image problem.  They have to meet a price point to turn a profit (like all companies).  But their price point is higher than most (especially foreign or those based in 'right to work' states).  Plus, I'm not alone in thinking they are not as reliable as Toyota and Honda, or even Hyundai, VW or Ford.

Personal note Dave - Save your dimes on the Explorer until it's a need (i.e. at least on child #2).  And even then, unless you're going to use the Explorer for something else (like towing), then go with a minivan.  So much easier for a family.  (Do I get my man-card revoked for that suggestion?)

[RitaRose1945]

Seems like leases are trending down.  Perhaps people are realizing the lease rules can be costly.

The only person I suggested leasing instead of buying is my mom.  She was thinking she might have to replace her car (10 years old with 30,000 miles) but she has early macular degeneration and might not be able to drive at all in three or four years.

Otherwise, they're rarely a good idea.

And even then, unless you're going to use the Explorer for something else (like towing), then go with a minivan.  So much easier for a family.  (Do I get my man-card revoked for that suggestion?)

[David in MN]

Personal note Dave - Save your dimes on the Explorer until it's a need (i.e. at least on child #2).  And even then, unless you're going to use the Explorer for something else (like towing), then go with a minivan.  So much easier for a family.  (Do I get my man-card revoked for that suggestion?)

Without going into depth on some personal stuff, we were lucky to get one child. And I actually could use the towing capacity both for the family boat and to tow a lumber trailer. Not that I would ever put down a Honda Odyssey. As much as I'm putting it off it is getting old using a car seat for a 2 year old in a 2 door car.

Buying a car is a hassle. I've driven just about everything that would do what I want a car to do. Still it's a pain to decide.

[FreeLancer]

The old rule of thumb is 10% of take home pay to car payments.  But new car prices are higher, to make the 10% you either have to put more down or stretch it out.

That's kind of what I remember from back in the day, although I've never indulged myself at that level.  Yet. 

Personal note Dave - Save your dimes on the Explorer until it's a need (i.e. at least on child #2).  And even then, unless you're going to use the Explorer for something else (like towing), then go with a minivan.  So much easier for a family.  (Do I get my man-card revoked for that suggestion?)

Totally agree.  I almost wish we had kids so I could talk my wife into one.

[iam4liberty]

I've noticed that Clark Howard and several other consumer advisors have switched how they talk about car purchases. In the past they would talk about limits in terms of percent of salary.  But now they recommend not having a loan longer than 48 months and getting your loan through a credit union.  This is brilliant positioning in that it eliminates the three biggest pitfalls for people who dont understand money very well. Limiting the length of loan limits the amount of car.  And using a credit union ensures an ok interest rate and that the price of the vehicle wont be too far from its market value.

[AvenueQ]

I was looking at new cars last year and ran into this problem (thank god I didn't buy one since I stopped working for a while for a wide variety of medical reasons shortly thereafter). Granted I made the mistake of going to the dealership, and so got the whole dog and pony show of a shifty car salesman (even though I had my man come with me FOR THIS VERY REASON). Every time I hesitated, he'd go back and get a longer loan with lower monthly payments for me. At 6 years I called it quits. He was also not giving me the advertised interest rate of 1%, saying that it was "based on your credit score". Then I came home and checked my FICO credit score through my Discover card. It's over 800.

God, can Amazon just hurry up and offer cars already?

(Only half-joking about that).

[David in MN]

Amazingly, it's not hard to find articles about this new 'subprime' crisis. Seems like a very open secret.

https://www.bloomberg.com/news/articles/2017-07-17/new-u-s-subprime-boom-same-old-sins-auto-defaults-are-soaring
https://www.cnbc.com/2017/06/12/auto-loan-delinquencies-rise-as-drivers-splurge-on-pricey-cars.html
http://www.marketwatch.com/story/heres-why-its-getting-harder-to-ignore-rising-subprime-auto-defaults-2017-03-30

Although I feel it's a little disingenuous to say that defaults are "spiking" at 4%. Yes that's a 33% increase but it's still rather little. It is a little worrisome that a crisis could threaten the overall economy but it's hard to parse out through the data if this is occurring because consumers are broke or if they're just buying too much car. Either way it doesn't seem to have hit pricing.

It will be interesting to follow. On the one hand this would indicate a future price drop. On the other hand I can only assume execs at Ford and Chevy cork the champagne when they see hurricanes and floods wash cars off the road. But it begs the question... How many people will get full replacement on a car they are financially underwater on?

The more I peel on this onion the more questions I have.

[Morning Sunshine]

It will be interesting to follow. On the one hand this would indicate a future price drop. On the other hand I can only assume execs at Ford and Chevy cork the champagne when they see hurricanes and floods wash cars off the road. But it begs the question... How many people will get full replacement on a car they are financially underwater on?

The more I peel on this onion the more questions I have.

very good questions.  It seems like a Depression-style event is long overdue; 2008 could have been, but the can was kicked down the road, and the media made things out to be better than they were, because Obama.  The .gov is trying to put that off as long as possible so that the current denizens of the swamp do not get blamed and take the hit.
Makes me wonder if Hoover was just the unlucky sod who got blamed, and all he did was be unable or unwilling to kick the can down the road for the next guy.

[RitaRose1945]

How many people will get full replacement on a car they are financially underwater on?

I'm still stunned by the number of people who don't know there's such a thing as gap insurance, let alone have the ability/willpower to save up money for a replacement car if anything should happen.

[Smurf Hunter]

I'm still stunned by the number of people who don't know there's such a thing as gap insurance, let alone have the ability/willpower to save up money for a replacement car if anything should happen.

Isn't gap insurance required by the lender?  Similar to PMI for your mortgage when you put < 20% of the sale price down?

Think of some entitled idiot who puts no money down on a $50K car loan.  The vehicle gets totaled soon after purchase and insurances pays out less than $40K. 
Dude has no car, and even after throwing all the insurance payout at his loan, he's still in the hole $10k.

The risk of a borrower defaulting under good circumstances, but underwater with no vehicle, seems HIGH risk of default.

The bank would do as well playing roulette at the local casino.

[danimal]

What's gap insurance....

Googling now