Do you have a car loan that you’re currently paying off? How much have you paid on it so far, and how long has it been going on? If you’re like many Americans, the amount you end up paying on your vehicle is far more than it’s actually worth. In fact, a lot of people find they can’t afford to make payments anymore and have their automobiles repossessed.
Auto loans are increasingly leading to financial hardship in our country and, according to hedge fund manager Jim Chanos, the practices of the industry behind it should “scare the heck out of everybody.” There are several reasons why.
The Auto Loan Problem
If you watch the show Last Week Tonight with John Oliver, you may have seen their piece on this topic last summer. It discussed how, with auto loans, people often end up paying two to three times what their car is worth.
The problem is that many auto loans are made through subprime lending. Much of this is done by the car dealers themselves. They specifically target people with bad credit, who are unable to obtain a regular loan, and instead offer them one with a higher interest rate and bigger risk. The average interest rate at a car dealership that provides their own auto loans is 19%.
Then, when the borrower can’t keep making payments, the car is repossessed by the dealership. It’s estimated that around six million Americans are currently unable to continue making payments on their car loans. When the vehicle is taken, they’re left with nothing. In fact, they may have less than that. Since the car is worth less than it was when it was sold, the dealer may decide that repossession isn’t enough to cover the amount owed and require the buyer to pay more. So now, not only have they lost their car, but they’re still in debt.
Meanwhile, lender/dealership keeps all the money they’ve made on the vehicle so far, as well as the car itself, which they can then resell to someone else. John Oliver’s auto loan piece also traced the journey of one car that went on this journey. It was sold, financed, repossessed, and sold again at least 10 times to different owners, none of whom could afford to keep making payments.
History Repeats Itself
This is not the first time that subprime lending has caused economic problems for Americans. That was what led to the mortgage crisis of 2008. Money was lent to people who couldn’t afford it, so that they could buy houses. This inflated prices, leading to a housing bubble. When people were unable to repay their loans, the bubble burst and property values plummeted.
This is exactly what’s happening now with auto loans. The rate of delinquency for subprime loans is currently around 2%, which is the highest it’s been since the economic crash. Car loans in particular have reached a record high, with $280.2 billion currently outstanding. If these trends continue, it’s likely we’re headed for another financial crisis in the near future.
As a general rule of thumb, you should never borrow money to put into an asset that depreciates, such as a vehicle. Even a regular loan can take years to pay off and cost you a lot of money. Then, by the time you’re done, the value of the car is far less than it was when you bought it, and lower still than what you ended up paying for it. You may need a vehicle to get you back and forth to work every day, but if you have to borrow money to get it, the ultimate price just isn’t worth it.