The number of people in default on their car loans is growing rapidly and industry watchers are on high alert because of it. Not only is the number of repossessions on subprime loans doubling, but the rate of repos on prime loans is also said to have doubled since 2020.
It’s a huge red flag, reports Barrons, who spoke to dealer Lucky Lopez. He says most of the repossessed vehicles he sees going to auction had loans that started in 2020 and 2021. Normally, he reports, loans are spread out over many years as people go through tough times. at different times in their lives.
Part of the reason for rising default rates is that buyers are getting temporary increases in income during the pandemic from government stimulus programs. With these programs shutting down and inflation rising, more and more homeowners are under water on their loans.
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Lopez said he recently purchased a Bentley, a McLaren and two Aston Martins that were purchased using PPP money as a down payment. All of these companies, among other luxury brands, posted record sales in 2021 despite the pandemic.
It wasn’t all bad loans, however. Lopez said he also bought a Chevrolet Silverado that was repossessed from a borrower with a fairly good 700 credit rating who was only able to make two payments.
The default rate, however, cannot be entirely attributed to stimulus. Pamela Foohey, a law professor at Yeshiva University’s Cardozo School of Law, warned last year that an auto loan crisis was brewing before the pandemic hit. Outstanding auto loans were at record highs and delinquencies were at record highs every quarter before 2020.
By the time the bubble was about to burst, however, the government’s response to the pandemic meant the bottom hadn’t quite fallen off the market. The market, however, looks set to explode again, she told Barron’s.
Some say the silver lining is that market difficulties can help slow inflation. Lopez said, however, that banks won’t just dump repossessed cars on the market, which means values may not plummet. The effect of all this on the wider economy will not be good, he says.
“The idea that the economy is strong? Anyone who actually does business sees things aren’t solid,” Lopez said. “We had a housing bubble in 2008, and now we have an auto bubble.”