It’s really a big problem.
- Many people have no choice but to finance a car through a car loan.
- Because cars have been so expensive and consumers have been quick to borrow, we could be heading for a crash in the auto market.
Some real estate experts have issued warnings about a possible collapse in the real estate market. But that’s unlikely to happen for a big reason.
Currently, the supply of homes on the market is very limited and buyer demand is still strong. Even as buyer demand declines due to factors such as rising mortgage rates, the reality is that homeowners are sitting on record levels of equity. It is therefore unlikely that we will experience a scenario like the one we experienced in 2008, when foreclosure rates skyrocketed and homes began to flood the market at a faster rate than demand.
But while a housing market crash may not be imminent, real estate expert and YouTube personality Graham Stephan fears the auto market is heading for a major upheaval. And that’s something consumers should be aware of.
Consumers have borrowed too much
Most vehicle purchases are financed through an auto loan, and that’s understandable. But unlike mortgage lenders, who tend to impose strict borrowing conditions, auto lenders aren’t very strict. And so it’s pretty easy for the typical consumer to get approval to borrow for a car, even if they can’t really afford the payments they’re making.
Additionally, car buyers with poor credit tend to end up with high mortgage rates. That means they might have a harder time dealing with their car loan debt than the typical buyer.
Stephan estimates that 25% to 50% of auto loans go to consumers who may not be able to repay them. And now, 5% of auto loan borrowers are behind on their payments, and almost 50% are underwater on their auto loans, meaning the amount they owe on their vehicles exceeds the value of those vehicles. themselves. It’s all very reminiscent of the housing crash of 2008, except we’re talking about cars, not houses.
But the underlying problem is the same. Stephan thinks too many people have taken on car loans they can’t afford. Those who are unable to meet their payments – whether due to job loss or some other reason – will not be able to sell their cars for as much money as they owe their lenders. And people in this scenario risk having their car repossessed, like the number of owners who were foreclosed in the 2008 housing crash.
But if this situation were to occur, the auto market could easily be flooded with inventory. That’s not necessarily a bad thing for consumers looking for a car. But that’s bad for the auto industry and the economy as a whole (because really, no one wants to hear about bailouts from the automakers).
Borrowers need to be careful
It’s too late for existing auto loan borrowers to go back in time and not take out expensive loans that they can’t really afford. But those currently in the market for a car should be aware of how much they are borrowing – and also be aware of inflation when it comes to vehicle prices.
In fact, right now is actually a bad time to buy a car because inventory is still down, vehicle prices are high, and loan rates are rising. Those who need a car right away may not be able to delay that purchase. But those looking to upgrade a functional car may want to sit back and wait for more inventory to hit the market, whether that’s due to the opening of supply chains or an increase in repossessed vehicles. .
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