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Published On: Sun, Nov 17th, 2019

Auto Loans Are Hitting New Highs, But Why?

In the United States and throughout the world, auto loans are becoming more common. Americans alone originated more than 27 million new auto loans in 2018, which represented an increase of 183,000 over the previous year. In Australia, 2017 set a new record for car sales, with most purchasers taking out a loan to finance their new vehicle. 

So why are auto loans becoming more common, and should we be worried about this development? 

Factors for Increases in Auto Loans

There are several driving factors leading to an increase in new auto loans: 

  • People are buying (and driving) more cars. First, people are increasingly interested in cars. For decades, most cities have shifted to favor motor vehicle operators over pedestrians. Some of those trends are beginning to reverse, but not quickly enough to dissuade people from driving. Also, gasoline prices are at record lows, meaning it’s cheaper than ever to drive on a regular basis. With increased interest in driving, more people are looking to buy cars—and most people can’t buy a car without a loan to cover the costs. 
  • The diversity of available vehicles is increasing. The number of available vehicle options is also increasing. There are more automakers than ever, churning out new models of vehicle in response to demand. On top of that, older cars are reentering the market as used options, meaning there’s an option for every buyer and every budget. 
  • Loan options are becoming more attractive. Even more importantly, auto loans are becoming more favorable for consumers (and easier to get). Thanks to low interest rates in general, banks and lending institutions are able to offer more attractive loans, with lower interest rates and better terms. When auto vehicle buyers see these terms and conditions when shopping for a vehicle, they find themselves able to afford a better car than they believed they could. This is also inviting more people to consider buying a vehicle, when they previously wouldn’t have considered it.
  • Loan standards are becoming lower. There’s also some evidence that credit and financing standards for assigning loans are declining. For example, according to a recent report, Santander Consumer USA Holdings (a U.S.-based auto lender specializing in subprime auto loans) verified the income of just eight percent of its borrowers. Other firms may be engaging in similar practices. With less time spent doing due diligence, red flags become less common, and the approval rate of loans spikes sharply. 

photo supplied/ bankruptcydocumentslibrary.com/

Is There an Auto Loan Bubble on the Horizon? 

The 2008 economic crisis brought with it the worst recession in modern history, and it’s commonly believed the first link in the chain that led to that crisis was deregulation in the financial industry. Subprime mortgages (home loans give to people with below-standard credit scores) were given out more frequently, and derivative products were stacked on top of them, resulting in high levels of financial dependency on the repayment of those mortgages. Soon, homeowners found themselves unable to pay their mortgages, resulting in millions of foreclosures and the collapse of the products dependent on them. 

Because auto loans are being given to people with lower-than-average credit, and in high numbers, some economists worry that this could lead to another economic bubble. Eventually, car owners may find themselves unable to pay back their loans, resulting in economic hardships for both banks and consumers. 

However, there are some major differences between the increased loan availability in the auto industry and the housing crisis of 2007-2008. For starters, auto loans tend to be much smaller, and carry with them more favorable terms. Rather than borrowing $200,000 or more for a home, borrowers are taking out loans for $30,000 or less. The risk of missing a payment is lower as well.

It’s also worth noting that the credit standards applied to car loans today are nowhere near as bad as they were in the years leading to the economic crisis. Fewer financial institutions are playing a role in the distribution of these loans, and fewer derivative products are being stacked on top of them. Plus, auto sales may be starting to reverse themselves after peaking a few years ago; in the next several years, auto sales may begin to slow. 

If you’re in the market to buy a new vehicle, now is a fantastic time. Vehicle loans are more available and more favorable than they’ve ever been before, which is good news for anyone shopping for a car. There may be some high-level economic risks associated with increased auto lending, but they pale in comparison to the conditions that resulted in the housing crisis and economic collapse of 2008. And this is likely a temporary trend; auto loan availability and rate favorability may begin to decline in the next several years.

Author: Anna Johnasson

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  1. […] Auto Loans Are Hitting New Highs, But Why? – In the United States and throughout the world, auto loans are becoming more common. Americans alone originated more than 27. […]

  2. […] Auto Loans Are Hitting New Highs, But Why? – In the United States and throughout the world, auto loans are becoming more common. Americans alone originated more than 27. […]

  3. […] Auto Loans Are Hitting New Highs, But Why? – In the United States and throughout the world, auto loans are becoming more common. Americans alone originated more than 27. […]

  4. […] Auto Loans Are Hitting New Highs, But Why? – In the United States and throughout the world, auto loans are becoming more common. Americans alone originated more than 27. […]

  5. […] Auto Loans Are Hitting New Highs, But Why? – If you’re in the market to buy a new vehicle, now is a fantastic time. Vehicle loans are more available and more favorable. […]

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