Auto loan defaults rise as subprime loans soar - Baltimore Post-ExaminerBaltimore Post-Examiner

Auto loan defaults rise as subprime loans soar

Subprime auto bonds are booming, with loans being sold to big investors in lucrative packages that include risky securities. Similar to the subprime mortgage crisis which led to the recession but on a much smaller scale, the auto industry is moving into risky territory.

The auto industry’s loans are valued at $1.2 trillion, so a crisis is expected to have far less of an impact than the housing market.

The colleterial behind the bonds being issued are less safe for investors, as borrowers are opting for 72-month loans over 60-month loans, large loans are being taken out and vehicle values are depreciating. Borrowers with credit scores in the 580 range are able to secure loans even with poor credit.

Interest rates as high as 11% are being promoted, with many owners underwater on their car loans.

Annual loss rates for subprime auto loans are up 3% since 2013, according to Goldman Sachs Group. Loss rates were at 5% in 2013 and up to 8% last year.

The Federal Reserve’s goal to increase interest rates has also led to many consumers choosing used vehicles over new vehicles. Car salesmen are helping those with credit scores under 600 find used vehicles with subprime options.

The issue for these less-than-creditworthy purchasers is that subprime interest rates are on the rise, with the average rate being 15.91% last year and 16.84% in 2018. The outcome is a staggering monthly payment that is similar to, or higher than rates that a creditworthy person would get on a new vehicle.

A used vehicle on a 60-month loan of $20,000 will have payments increase to $495 per month, up $10. The cost over a 60-month period comes out to $29,700 for a $20,000 vehicle. High-interest rates are causing consumers to be underwater on their loans when they go to trade in their vehicle.

Consumers are rolling the outstanding balance of their loans into new loans on trade-in, resulting in debt that follows the consumer.

Underwater consumers are causing a rise in Miami car equity loans and loans around the country, where consumers are taking equity out of vehicles they own to try and pay off other debts.

New car sales fell for the first time in seven years in 2017, with the auto industry projecting falling sales in 2018. Used car sales are on the rise, as the number of new vehicles sold in 2018 is projected to be 16.6 million, down from 17.1 million a year prior.

Borrowers with good credit are able to receive new car loans with interest rates that are 25% of what subprime loans offer, or roughly 4%. Buyers that have credit scores of 600 or less make up about 20% of new car sales. About 61% of new car sales are going to borrowers with credit scores of 660 or higher.

Average loan amounts have also risen $291 from a year prior to $30,329.

Auto dealers fear that consumers are going to be forced into older vehicles as interest rates rise, and some dealers even warn that low credit consumers will be pushed out of the market entirely.

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