Back in 2008, Americans hit what has become the worst economic disaster in our country’s history. It was worse than the Great Depression of the 30s. For nearly an entire decade, it threw Americans into panic. It fueled the $1.53 trillion student loan debt crisis. What started the Great Recession was known as a ‘housing bubble’.
Just before the recession hit, property values were going through the roof. As the value of something expands, it creates what experts call a bubble. It’s called a bubble, because eventually, it pops. When the value of a home became three times what people were even making, suddenly they had a difficult time paying their bills.
Debt starts increasing and it nearly chokes an entire market. That throws the entire economy for a loop and drastic measures have to be taken. Right now, there are signs that the same thing is happening in the auto industry. Back in 2018, nearly 7 million people were extremely late on their auto loan payments.
That number is significant. It’s a record for auto loans. Even during the recession when money was scarcer, the number only approached one million. These are people who are more than three months late with their payments. This is at a time when the economy is smoking hot. That’s a 75% increase in the last decade.
What’s Causing People to Not Pay their Auto Loans?
More people than ever before are defaulting on their auto loans. What is the real cause of this? Right now, a lot of it has to do with the lenders themselves. They’re more open to giving auto loans to people who have riskier subprime credit. That means their score is under 670. Cars are a necessity to many, so they’re willing to pay whatever the asking price is.
The lender won’t say no, so they often fleece the customer. They even know a lot of these people won’t be able to repay their loan. And now that these subprime borrowers can’t pay back their loans, many millions are now in default. That hurts their credit score and is leading us towards a new recession.
In fact, the way the auto bubble is growing looks very similar to the housing bubble that started the Great Recession. Of course, predicting when recessions hit is just as steady as knowing what the weather will be like a few months out. Sometimes, you know a storm is brewing in the distance, but knowing when and where it will hit is unknown.
The Brewing Recession
The massive housing market crashed when it grew too large and people were defaulting on their loans. The same is happening with auto loans. They’re growing so large and it’s forcing many Americans to default. Eventually, the auto loan market will crash. Will it take the whole economy with it? Three-fourths of Americans believe that buying a new vehicle is unaffordable.
The average U.S. household can only afford half of their car’s value. This scenario is scaring plenty of experts. They do see dark recession clouds forming in the horizon. Experts like Howard Dvorkin, the chairman of Debt.com.
“This tells me the auto bubble will become a problem if it isn’t already one,” Dvorkin says. “After all, if the average American can afford just over half of the average new vehicle, the logical conclusion is that auto loans are going to continue to skyrocket.
“While many experts might see an auto loan crisis as remote; I’m reminded that very few of us predicted the housing bubble. Those who saw it coming (as I did) didn’t realize just how deep it would go.”
Why Are People Taking on More Auto Loans?
The first thing to look at is why people are taking on more auto loans than they can afford. Then you’ll start to see why the value is increasing. Infinity Research did the job looking at this and came to a startling conclusion:
“Cars are no longer seen just as a means of transport; rather they are now a status symbol. This explains how frequently the cars are being bought and sold. Five years back, the ownership cycle of a car was around 7 years. Today the ownership cycle has come down to 4 years, and market analysts believe that by 2021 the period might come down to 3 years.”
That’s right, it’s impatience and pride. Owning a car for more than a few years is seen as becoming taboo. People see the latest and greatest thing on the market. That leads them to give on the vehicle they’re currently paying off to take out yet another mortgage for something even newer. They do this without even making enough money to do it.
People who are in major debt and don’t even have a decent credit score are trading up. But there’s more to the story. There’s a number of great used vehicles out there right now. You can get a much better value looking at used than brand new. Yet, that’s not the path people are taking. They still want new and it’s throwing them into major debt.
The Infiniti Research study suggests, “Decreasing ownership cycle also means that quality of used cars is rather good, and buying it is a total value for money.”
How to Protect Yourself from an Impending Bubble?
You need to be ready for when the bubble hits and threatens to burst. In order to do that, you have to lower your overall debts. If you’re one of the people helping to cause this problem, consider stopping. Realize you don’t need a new vehicle every few years. Get something you can pay off in a few years and then get out of the debt cycle!
By having a car you already paid off, it will keep you from constantly spending. Imagine having those payments in your pocket because you no longer have to make expensive payments? That allows you to save money, which is what you really need to survive a recession. Those who are able to save are more apt to get through any phase of the economy.
Finally, don’t get caught up paying on something you can’t afford. You might think you need that brand-new car, but if your credit isn’t perfect, you will be paying through the nose for it. You simply can’t afford it, and the interest that will accumulate over that time. Build yourself a safety net and the rest should be fine.
