High car prices and auto loans

J

Joe1

Joined
Mar 14, 2003
Messages
892
Location
USA
With both new and used car prices at elevated levels nowadays, many are taking out loans for longer durations to hit a monthly payment target.

If (that is a big if) automobile prices normalize in the not too distant future, there will be many driving around in vehicles that are underwater. At trade-in time, they may owe significantly more than their car is worth.

I was wondering if there will be a sharp spike in auto loan defaults down the road.
 
People defaulted on their home loans for this reason. Nowhere is it written that real estate will appreciate nor that equity will be pronounced on the depreciating value of an asset.

People need a roof over their head and transportation. If that means having to acquire the means from a source other than ones own coffers then there will always be people upside down on borrowed money.

I don't believe we will see a large spike in defaults. In fact, as long as there is cheap and nearly-free cash available you can expect prices to increase and sales to soar on over priced luxury items.
 
Even at the best of times when dealers and manufactures offered good incentives on new vehicles, many people were upside down the minute they bought a vehicle.

As I've said before, we are going to see higher prices on new vehicles and become closer to what Europeans and others pay for buying new.
We in the USA are getting the worlds best deals on new vehicle pricing. That is why countries like Australia and New Zealand with a combined population of about Texas can offer things we don't see here.

Like a base Ford Focus in New Zealand starting at an equivalent $27,200 USD.
Meanwhile in the USA, a new 2022 Camry starts at $25,295.
 
Most auto buyers were already sunk in their vehicles. If anything it has gotten better with elevated trade prices.

I was tanked in my VW, and this market craziness allowed me to get completely out from under it.
 
a general consumer tends to keep a loan longer than a car which is insane in my playbook; with prices of everything skyrocketing, while the wages do not keep up with, I would not be surprised that in near future 2-3 years from now on to we have a dire credit/loan situation something like in '08
 
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What is this "normalizing" you speak of? They spike like a rocket and float down like a feather.

I wonder about leases... how are the banks coming up with residual values, what does this do for monthly payments, and will this divert some prospective leasees into getting loans instead?

Cars are still relatively safe investments for banks vs home mortgages. People will (have to) live in their cars and so keep making the payments. And there isn't a moratorium on evicting/ foreclosing on cars.
 
wpod said:
I try to save up and pay cash or take advantage of 0% loans. I try to live with in my means.
Click to expand...
This. With the exception of the Alfa, I've never had a car loan over 1%.

OP, you asked if we'll see defaults in the future. I believe we will, but I also believe most people that buy a new vehicle, via financing, owe more than it's worth the moment they drive off the lot. Also, few people actually pay off these loans, Rather they keep trading in and rolling their existing loans into the new one and kicking the can down the road so to speak. A lot of people are simply looking at their monthly payment as opposed to their total repayment cost.
 
It does seem that we could have a supply/demand/price correction in the next year or so. Ford has many 10's of thousands of 2021 F150's sitting and waiting. Consumers will be painfully aware that they are getting a 2021 truck in June of 2022.

All of us know that future predictions are impossible, and some of us think that this time may be somehow different. However, if we use the last 50-90 years as a guide, I'd expect car/truck owners to (as the OP says) "owe significantly more than their car is worth".

Then mix in EV's and other new tech....

My take:

1) A vehicle price correction will happen, whether that's a flattening of vehicle prices when contrasted with inflation or a lowering of prices, I can't know
2) Fuel prices will remain high as pressure for carbon credit taxes and fees mount. Driving down the price of the less desirable cars/trucks.
3) The market will be flooded with discounted, leftover, new cars/trucks that finally receive chips.
4) EV's will continue to be stupidly expensive and people will start to understand the limitations and costs.
5) The stock market "cycle" looks like it's due for it's 10 year downturn.
6) Overproduction of vehicles will affect the entire economy, as we have both leftovers and need to produce more new 2022's.

DJIA_historical-1024x512.png


1635605687592.jpeg
Sea-of-Ford-F-150-pickups-Getty-5.jpg
 
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I have been surprised that you can even get a used car loan unless the banks are insisting on large down payments. The only thing I can imagine is that they are sitting on so much money they are forced to find something to do with it.
 
Just because you are underwater on the loan doesn't mean that you will default? It just isn't a good value. If they pay off the loan and keep the car it won't matter. It will only matter if they try to trade it in within a few year.
 
People have been underwater on their loans for years due to obscenely long loan terms (especially for US domestics) and surprisingly people keep paying.
 
The stock market “cycle” is that there is no cycle. The market is unpredictable, other than the fact that viewed over decades, the trend is up on all the major indexes. There is no 10 year cycle.
 
The problem is the supply chain, and it affects products across the board. The semiconductor chip shortage is a perfect example. Chip companies react very slowly to forecast changes due to the complexity (and cost) of changover. And getting new equipment is difficult because the chip tool companies are having trouble building the requisite equipment.

From a vehicle ownership standpoint, I believe BITOGers are in a beneficial position because we tend to take care of our vehicles.
Regarding loans, loans are products as well and will cost whatever the market will bear, coupled with guidance from the Fed.
 
wdn said:
The stock market “cycle” is that there is no cycle. The market is unpredictable, other than the fact that viewed over decades, the trend is up on all the major indexes. There is no 10 year cycle.
Click to expand...
You are likely to be quite correct and I agree, but many see such a cycle, especially in recent times. The brokerage firm I use clearly talks about such. It's also why I put the word "CYCLE" in quotes. As any pattern is nowhere near clear.

Here is a link to just such a discussion: https://www.seasonax.com/research/dow-jones-10-year-cycle
 
Not good , many will be in over there heads . Depreciation . Happened after Katrina / Rita . People don't learn or do the hard way . It's a cycle . It's nice not having a car loan with high gas prices and ridiculous new/used car prices . Hopefully won't need one in the future .
 
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it seems like everyone is after a American consumer in current environment; many shady practices are out there, dare to say wild Wild West practices

www.consumerreports.org

Many Americans Are Overpaying for Their Car Loans - Consumer Reports

Thousands of consumers with good credit are overpaying for their car loans because they've been put in subprime loans, Consumer Reports found. Many others may be at high risk of default.
www.consumerreports.org www.consumerreports.org
 
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