Car Loans Crash – No Impact

By early 2008, a few months after a major Bull market peak in stocks, Yellow Flags on the US economy had turned Red across the spectrum. Bond spread risks were spiking, consumer and business confidence surveys collapsing and many indicators were signaling trouble. Today’s purveyors of gloom haven’t given up the ghost from the last recession and warn of impending doom due to a record Seven Million Auto Loan defaults and the worst default rate in almost 7 years. While we are suspicious of this Car Loan crash report and its importance, we don’t see the Red or even Yellow flags that presaged the last recession. There are no signs of a downtrodden working class throwing in the towel. While it’s not good news to see more people failing to pay back their car loans, by most measures the vast majority of the population is fairing well. Poverty rates are near record lows, wage growth rates sit at 10-year highs, consumer debt service ratios are at record lows, jobless claims are near a 49 year low and consumer spending has been exceptional. 

What about car loan defaults? The Equifax credit report differs from other credit agencies, but even here, note the gradual trend in Equifax estimation of rising delinquencies. From 2006 through 2008 there were a series of delinquency spikes from Mortgage, Credit Card and Revolving loans as the economy worsened. This time we see a gradual rise in delinquency of Auto loans but nowhere else while the economy has clearly been improving. If the Equifax data is an accurate reflection then it appears to be more an aberration relative to the economy and a management oversight issue that will be resolved without dire consequences.

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The rise of millennial car buyers over the past 5 years with lower income and credit scores may be a factor in the Equifax reports. Since 2014 the more volatile under 30 car buyers have accounted for the bulk of new defaults, which contrasts with the sharply increasing delinquency rates of all age groups prior to the Great Recession of 2008. 

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