Subprime Auto Loan Bubble: Reality or Fear?

The New York Times tackled the concept of a subprime auto loan bubble through an in-depth news story. Their story seemed to paint those who take out subprime auto loans as victims of their situation. They are simply accepting the only loans that they can qualify for, often with challenging financial results. Lending institutions were depicted on the predatory side. As we reported previously, the NYT piece as well as others that have come out in recent months point to the possibility of a subprime auto loan bubble. What accompanies those types of reports is fear. Fear, there will be another financial meltdown similar to the housing crisis. However this one would be constructed and collapse on the backs of high-risk auto subprime loans. The question is: Are the fears justified?

Experian reported that for the third quarter, there was a 9% increase in defaults on auto loans. During that same period, TransUnion saw a 13% increase. One of the factors behind the increase in payment problems is the rising cost of cars. We reported that during the third quarter, Americans took out more loans than they have since 2005. The current amount of auto loan debt held by consumers is $924.2 billion dollars. According to the Federal Reserve, Auto lending was up $23 billion in the third quarter of 2014. Automotive lending has increased $89 billion more thus far than it did 2013.

However, they also reported that auto loan delinquency rates were down to 3.1% from 3.3% during the third quarter of 2013. Does that slight change show a positive loan payback trend? The auto loan delinquency rate for the first quarter of 2004 was 2.3%. That rate didn’t hit 3% till the fourth quarter of 2007, when it reached 3.1%. The highest auto loan delinquency rate in recent years was 5.3% in 2010. Since that peak, the rate trended downward till it plateaued at around 3% in the first quarter of 2013. In an October 6th story on this subject, Amy Crews Cutts, SVP and Chief Economist at Equifax said, “Importantly, auto loan originations to borrowers with subprime credit scores remain stable, providing additional evidence that a bubble is not occurring in that space.” Do you think that there is a subprime loan bubble? Will subprime auto loan volume continue to rise? Will auto loan delinquency rates continue to climb?