Record number of car buyers underwater on their trades; loan lengths increasing

[ksa8907]

Auto loans aren't inherently bad, just when people don't look at the big picture. Most expensive i bought is the current one my wife has, but an interest rate of 3.25% means there is little need to put money down on the front end because the finance expense is so low. Better to keep the liquidity for an emergency.

[MetroMPG]

Some numbers released this month show car consumers digging ever deeper holes in their finances...

As a reminder, in 2016...

... the average amount of negative equity rolled over into a new car loan stood at $6,659 in 2016

And now the numbers from last year...

In 2018 30% of vehicle trade-ins in Canada were in negative equity averaging -$7,051

https://canadianblackbook.com/blog/c...-press-release

On the other hand, whenever I get into a newer car after driving my old-school winter beater Metro, I fully understand the siren call of a fresh (modern, quiet, refined, powerful) set of wheels. Fight the power!

[Frank Lee]

Doesn't appeal to me; in fact when in an SUV I feel like a douche.

[redpoint5]

I had an interesting discussion on another forum where the opinion of one member was that the car bubble bursting will trigger a mild recession. His theory is that car repos will skyrocket as people fail to pay their cars off, and new car sales will flounder. When new vehicle sales flounder, it will lay off many people in industries that rely on new car sales (vendors, etc).

This is my position in a nutshell: Most new car consumers don't think like I (we) do. They follow a different drummer. For the time being, while the economy is ostensibly good, most consumers could care less about price (as indicated in the data I posted earlier)...be it the price of a car or the gas and maintenance expense that goes with it. But that exuberance is, as we speak, in the process of going downhill fast. Not 6 Months ago, a person with sub 500FICO credit could buy (finance) a $50,000 vehicle over a 96-Month term. Today, not so much. The Subprime auto financing bubble is bursting right now around us. 30% of ALL new cars sold in the past couple of years have been financed with subprime paper. The true subprime auto finance default rate is about 11% right now.

Why is this important? The auto industry has, like the housing market of 12 years ago, been artificially propped up with easy credit.

We all may remember the subprime housing bubble collapse. At the time, subprime housing financing represented somewhere in the neighborhood of $500B - $700B in suspect paper. That was one of the many linchpins that took the economy down. Today, Subprime auto loans represent $280B in suspect paper...today. Probably a lot more. And unlike real estate that is a traditionally appreciating asset, vehicles are the exact opposite. The Gub'ment could buy all the bad mortgage paper (at taxpayer expense), sit on it, and sell years later near a break-even. Impossible with subprime auto finance paper.

Obviously, an Auto industry melt down will trigger huuuuge negative consequences. But other economic risk factors are at play as well: At full employment (that's where we are), the folks driving a car financed with subprime paper - need their cars to get to work. 20% of the population are in subprime financed cars. They will stop paying their high interest revolving credit cards before getting their whips repo'd. This will cascade negatively to other financial markets, causing all lending to become more expensive. Small & Medium Businesses, who also are in a quasi subprime operations financing bubble will need to cut cost to service their already massive debt. This is already seen in the US Bond Yield curve flattening and other historic indicators. And lest no one speak the taboo $1.4T student loan bubble.

Look, we all know that an economic recession is inevitable. And we are past due (squuze the pun), the only question is when. My 'feeling' is in 16 Months, perhaps a bit longer, the inevitable will be a stark reality. These downturns have an affect on consumers perceptions. When we think things are great, and our future financial prospects seem boundless, we tend to purchase what we want (on credit). But in the upcoming dark days, we will be compelled to examine our personal finances closely. All of a sudden, nobody cares about comfortable leather seats...consumers will care more about how they can minimize their transportation cost. People will be far more sensitive to TCO and receptive to non-traditional alternatives.

This is where I say EV's will answer the call. EV's are perfectly positioned to scale battery manufacturing - using the investment capital of today, earned from...the subprime auto finance bubble. And as we all know, once a consumer goes Electric, they (likely will) never go back.

So it's not $4/gal gas or $5/gal gas. It's It's bearing witness to ones friends and family being out of work and facing harsh challenges that will affect mass EV adoption. At least I think so.

[slowmover]

Certain industries (profit streams) are “guaranteed” by the taxpayer. Cars, like rail, aviation or oil & gas, are part of that.

The justifications are fun to go through.

.