GenFKD: Will Record Auto Loan Debt Crash the Economy?

by David Grasso, GenFKD

While many millennials are opting out of car culture, our record auto loan debt demonstrates that America’s love affair with the automobile is far from over. The vast majority of us still live in places where not having a car amounts to an enormous inconvenience, if not an impossibility.

We need cars to move around our metro areas, and more often than not, we buy these machines with borrowed money. After several years of a car-loan-borrowing binge in America, default rates are starting to creep up, especially for subprime borrowers.

What’s subprime? It’s not good

When borrowers with bad credit go take out a car loan, they are charged significantly more than consumers with good credit. This is because interest rates on subprime auto loans are often north of 20 or even 30 percent — rates that many would consider abusive to the average consumer. The subprime auto loan industry is extremely lucrative, because lenders can make enormous returns on their money, while facing little downside. After all, if someone doesn’t pay their auto loan, they can easily go repossess the car and turn around to sell it again.

The amount of people who have subprime auto loans is higher than you might expect. Consider almost a quarter of auto loans fall into the “deep subprime category” (consumers with credit scores less than 500). Lately, default rates have been creeping up, making some worry that there’s a bubble in auto loans that goes far beyond the subprime category.

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