09/17/2020

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Wall Street is Wary About Auto Loans



A Decade-Long Boom in Auto Lending


Auto lending has increased by 90% over the past decade. This sector of borrowing is growing faster than any other, except for student loans. When the COVID-19 pandemic hit the US, outstanding auto debt was at an all-time high of $1.35 trillion.

As unemployment stays high, stimulus money begins to run out, and payment deferrals end, analysts worry that the auto-lending bubble could pop. This would leave both lenders and borrowers in difficult positions.

Comparisons to 2008


For the past ten years, consumers have been borrowing money to buy more expensive vehicles. Auto lenders have offered low interest rates, as well as longer loan terms and low monthly payments.

Before the financial crisis of 2008, consumers committed to mortgages that they were later unable to pay. However, during the housing crash, most people did not stop making payments on their cars, even if they could not pay their mortgages. This pattern led investors to see auto loans as safer than loans on houses. 2008 trends would suggest that most people were more willing to find new places to live than to give up their means of transportation. However, every economic downturn is slightly different, and a wave of car loan defaults could be imminent.

Looking Ahead


An onslaught of auto loan defaults could be devastating for industries and individuals. The used car market would be flooded with inventory, which would cause a price drop for new and used cars. Worse, people across the country could be left without a way to get to work, just as enhanced unemployment benefits end.

On the upside, Congress is negotiating terms of another coronavirus relief package, which will likely include another round of stimulus checks and other aid. This assistance could help people pay their car loans and prevent a wave of repossessions.


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