It's Not Just Pricing, Auto Loans Are Also Getting Out of Hand

Matt Posky
by Matt Posky
it s not just pricing auto loans are also getting out of hand

As you’re undoubtedly aware, now isn’t the best time to purchase a new vehicle. While you can currently sell your ride for more than it’s realistically worth, the economy is anything but stable as inflation and supply shortages gum up the works. A lack of semiconductor chips has caused the automotive industry to stutter endlessly throughout 2021, with the issue getting so bad that some manufacturers have been building unfinished vehicles just to give their employees something to do. Ford is even mulling over a strategy to ship those units directly to dealerships so they’ll have something on the lot — effectively making its retail network responsible for final assembly.

But the logistics nightmare is only part of the story. Automotive loans are also becoming untenable as terms stretch out endlessly. Cars continue getting more expensive and the average consumer is losing their buying power. The preferred solution is for financiers to extend agreements so customers can continue making the same monthly payments while accruing more on interest over the duration. While effective in the short term, and bound to make banks money as we’re all driven deeper into debt, one wonders how this plays out on a grander scale.

History would suggest rather poorly.

America’s last big recession wrapped in 2009 and was preceded by swelling prices and lengthening loans. But the average terms on a new vehicle had been tamped back down to 63 months by 2010. They’ve been climbing back up ever since and are now surpass 70 months. According to the U.S. Department of Labor, used automobiles were 45 percent more expensive in June 2021 than they were in June 2020 while new cars saw an almost 6 percent increase over the same timeframe. But businesses have managed to keep monthly payments from getting out of hand by extending terms. You’re still paying more overall, but you’ll feel less of a sting every four weeks.

Blame COVID restrictions, increased regulatory pressure, predatory lending tactics, a chip shortage created by mismanagement/our own obsession with electronic devices, and the industry burning tons of money in service of chasing down electrification and the nebulous concept of “mobility.” They’re all to blame but the economy has also taken a pretty savage turn in general and it’s making a lot of people nervous about the future, including The Wall Street Journal.

The outlet recently published a study noting that this change has been particularly hard on the bottom rung of our economy. Longer duration loans are being offered to subprime borrowers and ultimately results in their paying more for the same product than someone who could afford to place more cash on the table and make larger monthly payments. However, the subprime and deep subprime segments now appear to be abandoning the market altogether.

From WSJ:

A 2018 analysis from Moody’s Investors Service showed that the cumulative losses of longer-term prime auto loans (those 72 months or longer) originated between 2003 and 2015 were two to five times higher than shorter-term loans originated during the same period. That is partly because longer duration loans tend to go to less creditworthy borrowers, according to Moody’s. Credit profiles of car buyers do look better today and consumers have more saved up thanks to stimulus payments and spending less during pandemic lockdowns. The average credit score for both new and used car buyers has increased since 2016, according to Experian. The share of prime lending has also increased over that period, while subprime lending is near record lows.

The flush bank accounts of car buyers is helping some of them make deals involving more cash. Loan-to-value ratios for car loans have “come in better as people are putting in more cash on the deals,” Santander Consumer USA Holdings’ chief financial officer, Fahmi Karam, said on the lender’s earnings call in April.

High used-car prices have also meant that lenders could command higher prices for the repossessed cars when loans default. Auto defaults were at a 10-year low as of May 2021, according to the S&P/Experian Auto Default Index. Recovery rates for auto asset-backed securities reached all-time highs in April, with prime recoveries rising above 100 [percent], according to S&P Global Ratings. Declining car prices will likely have the opposite effect.

But the outlet remains generally optimistic, suggesting that the swap to trucks and crossovers means the average automobile will be better at holding its value. Vehicles are also being retained longer than ever before, with the average age of roadworthy light vehicles now surpassing 12 years. While we would like to attribute that entirely to the industry providing increasingly durable cars, U.S. sales growth has been trending in the wrong direction — much like it did ahead of the Great Recession.

With Americans buying fewer cars per year, it’s not surprising to see the average vehicle age increase. It’s also not necessarily indicative of modern automobiles being more robust, though that likely plays a factor. Many are undoubtedly holding onto vehicles longer now that buying something else is becoming prohibitively expensive for a subset of the population. The middle class was already shrinking in this country, with the last couple of years representing the greatest upward transfer of wealth in modern history. Adding a few hundred more billionaires to the roster means a few thousand more six-figure automobiles get sold. But culling the wealth of millions of middle-class consumers means many of them have to pass on buying the vehicles that actually keep the industry humming.

[Image: Pathdoc/Shutterstock]

Join the conversation
3 of 32 comments
  • Jeff S Jeff S on Jul 18, 2021

    There might be fewer used vehicles available especially affordable ones. Agree that most manufacturers don't care and the loan periods will continue to expand but eventually it will reach a point where the loan period cannot be expanded anymore because the loan cannot be expanded beyond the average life of the vehicle. I doubt the Federal Government will legislate older vehicles off the road but in the larger metropolitan areas local, county, and and state governments could. The Federal Government could offer a program similar to the Cash for Clunkers that offers additional money to buyers of EVs to trade their older less efficient ICE vehicles for a new EV. There will still be some classic and antique vehicles still around but those are not usually driven on a daily basis. Many of the newer vehicles today with their more complex electronics and air bags will not survive as long as those of the past 20 years so older more polluting vehicles on the road will be less of an issue as it has been. Many of the older vehicles still on the road today are much cleaner and more efficient than those older vehicles 30 or 40 years ago and that trend will continue. Higher fuel prices and higher repair and maintenance costs will take more aging vehicles off the road even for those who cannot afford to buy new because after a period time it is cheaper to buy another used vehicle than to put more money into your present vehicle especially in colder areas where salt and road chemicals are used to treat roads in the Winter. It is getting harder to find any body shops that will repair rust on vehicles with most body shops making most of their money on collision damage on newer vehicles. Many body shops don't want to even give you a quote on repairing an older vehicle unless it is a classic restoration and then that is very expensive.

    • SCE to AUX SCE to AUX on Jul 19, 2021

      "eventually it will reach a point where the loan period cannot be expanded anymore because the loan cannot be expanded beyond the average life of the vehicle." I suspect that loan periods extend far beyond the time people actually keep a car. Effectively, this means people are leasing even when they buy.

  • Thornmark Thornmark on Jul 18, 2021

    it is savers that are getting screwed poor, middle class or rich

  • Tassos Before you rush to buy this heap of rusty metal, maybe you should wait a day or two.I hear Tim will have an Model T next time.
  • Redapple2 I d just buy one already sorted. Too many high level skills (wiring, paint, body panel fitment et. al.) that i dont have. And I dont fancy working 100 s of hours for $3 /hour.
  • 28-Cars-Later I'm actually surprised at this and not sure what to make of it. In recent memory Senator Biden has completely ignored an ecological disaster in Ohio, and then ignored a tragic fire in Hawaii until his handlers were goaded in sending him and his visit turned into it's own disaster, but we skipped nap time for this sh!t show? Seriously? We really are through the looking glass now, "votes" no longer matter (Hillary almost won being the worst presidential candidate since 1984 before he claimed the crown) and outside of Corvette nostalgia Joe doesn't care let alone know what day it happens to be. Could they really be afraid of Trump, who AFAIK has planned no appearance or run his mouth on this issue? Just doesn't make sense, granted this is Clown World so maybe its my fault for trying to find sense in a senseless act.
  • Tassos If you only changed your series to the CORRECT "Possibly Collectible, NOT Daily Driver, NOT Used car of the day", it would sound much more accurate AND TRUTHFUL.Now who would collect THIS heap of trash for whatever misguided reason, nostalgia for a much worse automotive era or whatever, is another question.
  • ToolGuy Price dropped $500 overnight. (Wait 10 more days and you might get it for free?)