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Auto Loan Market Gets Super Dark – Set to Unravel in 2017

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Car dealers across the U.S. have been stockpiling inventory based on recent sales, but evidence mounts they are hitting the wall with unsold cars, as creditworthy prospects retreat and the undesirables (FICO under 600) gather at the gate. 

Consumers are taking out longer auto loans. Last year, almost a third of the auto loans were for a term of at least six years.

Also consider that nearly 25% of car loans are subprime. Fitch Ratings reports the 60-day delinquency rate for subprime auto loans hit 9.1% in January, up from 7.9% a year earlier.

Elliiott Wave Financial Forecast says:

Car dealers continue to allow buyers to “trade in underwater vehicles two or three times, something that is evidenced in the lengthening loan terms.

According to Moody’s, the average loan period for a new car has risen from 62 months in 2016 to 68 months now. For subprime borrowers, the average loan term is now 72 months. This is sometimes referred to as “extend and pretend” lending; it’s what happens at the tail end of a credit boom.Liberal auto financing may be headed into trouble next year and beyond as sub-prime borrowers struggle with an average interest rate of 10.4%, compared to a rate of about 3% for prime borrowers.

At an average new vehicle price of more than $33,000, subprime borrowers would pay almost $10,000 more in total interest, and have monthly payments more than $100 higher than prime borrowers, for a seven-year loan.

During the Great Recession several years ago, many people lost access to some of their credit. Since then, many people have accumulated more modest quantities of revolving debt.
Yet debt is still a problem. Non-revolving debt is accumulating twice as fast as revolving debt, and people are unable to repay some of this debt.

Total consumer debt continues to increase, and non-revolving debt – which includes debt for vehicles and education – outpaced revolving debt, such as credit cards. In fact, during the past five years, vehicle and student loans grew by 42%, while revolving debt increased just 15%, according to an analysis of Federal Reserve debt data.

Edmunds.com projects a record-setting year, with 17.2 million new vehicle sales in 2016. But a report from Experian indicates that nearly one-third of current auto loans are subprime.

Some of those loans will never be repaid, if a new report from credit rating company DBRS Inc. is correct. The company projects that 18% of last year’s subprime vehicle loans will go into default, higher than the 12-14% of loans that went into default in the past two years.

Freedom Financial Network found:

1.Non-revolving debt continues to outpace revolving debt. In July (the most recent data available), total outstanding consumer credit rose by 5.8%, to a total projected $3.661 trillion, excluding mortgage debt. Outstanding debt has hit a new high each of the past 56 consecutive months. In July, the growth of non-revolving debt (debt for items such as vehicles and education, as well as unsecured installment loans) continued to outpace the growth of revolving debt (primarily credit cards). Non-revolving debt grew by 6.7%, while revolving debt increased half as quickly, by 3.4%

2. Personal income continues upward trend. In July (the most recent data available), personal income increased for the fifth consecutive quarter, by $71.6 billion, or 0.4%. Disposable personal income increased by 0.4%, or $60.1 billion, and personal spending increased by a modest 0.3%.

3. Personal savings rate declines. In the second quarter of 2016, consumers saved 5.7% of their personal disposable income. This rate is higher than rates in the spring, but it is lower than rates during the past three quarters.

4. Unemployment remains level; more than half a million discouraged workers. In August, U.S. unemployment remained the same as the previous month, at 4.9%. However, 7.8 million people were employed part-time, but wanted to work full-time or were “marginally attached” to the labor force. People who are marginally attached have looked for a job in the past 12 months but have not found one. Among this group, 576,000 people were discouraged workers, which means they have quit looking for work because they believe no work is available for them.

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