Auto debt hit a record in the fourth quarter of 2016, according to the Federal Reserve Bank of New York. Cars loans hit $1.16 trillion. That’s about $6,100 in car payments for every licensed driver in the United States.
But as with the mortgage crisis, it’s not the volume of loans that’s likely to cause the biggest trouble; it’s the number of loans being advanced to car buyers with less than sterling credit scores. In the past two years, U.S. drivers with credit scores of less than 620 borrowed $244 billion. That’s the highest since just before the global financial crisis when car sub-prime car buyers took out $254 billion in auto loans.
So where’s the bad paper winding up?
Surprisingly, not with banks this time.
It looks like the captive finance arms of car makers are on the hook this time around. Car companies through their captive finance units make about half of all car loans currently, but they’ve made three-quarters of sub-prime auto loans. Bank and credit unions have actually seen an improvement in delinquencies on their auto loan books, the New York Fed reports, but bad loans are rising at automakers.
That actually stands to reason since automakers have had the biggest incentives to extend loans in order to keep car sales high. Lower credit standards and longer repayment terms (six or seven years isn’t uncommon these days) helped push car sales up to 17.55 million in 2016.
Of course, if you want to be really, really picky about it, you could call those “sales” something like “extended rentals” since car companies are using their own money to make loans to car buyers and an increasing number of car buyers are then defaulting on their loans and giving the cars back to the lender.
Not my definition of sale. But that kind of lending to customers so that they will keep buying isn’t all that uncommon at the top of the cycle. Just ask Nortel Networks about that practice back in 1999. (Oh, that’s right, you can ‘t ask Nortel because the company went into bankruptcy in 2009 and never emerged.)
I’m not suggesting bankruptcy for any U.S.carmaker. Just pain as the cycle for auto sales comes to an end.