You probably remember the sub-prime mortgage crisis. It was one of the major contributing factors to the 2008 financial downturn/recession. “The private sector’s drive for short-term profit was behind it,” Forbes contributor Steve Denning wrote. More than 84 percent of the sub-prime mortgages leading up to the crisis were made by privately financed sub-prime lenders to low- and moderate-income borrowers. Because they were privately financed, the loans were exempt from federal mortgage laws and regulations.
Business Insider and the financial blog, Zero Hedge, have discovered some warning signs for car loans that are similar to the mortgage loan red flags raised before the recession.
In 2014, Equifax reported that Americans owed $902.2 billion in auto loans, a 10 percent increase over 2013 and an all-time high. Now, more than $972.4 billion is owed. Like privately financed sub-prime mortgages, auto loans aren’t regulated by the government.
Here are the facts about these rapidly growing sub-prime auto loans:
Longest Loan Repayment Terms – Ever
Imagine still making car payments after your car needs hundreds of extra dollars in maintenance costs due to high mileage! Experian reported the following loan facts:
- Average car loan terms are now over 5 years: 67 months for new cars, and 62 months for used cars
- Ultra-long loan terms from 6 to 7 years (74 to 84 months) make up 30% of new vehicle financing.
- Over 16% of used vehicles are also financed from 6 to 7 years — a historical first.
Highest Amounts Financed and Average Payments – Ever
The 2015 Nissan Versa is America’s least-expensive new car at $12,815, but the average new car loan amount could buy more than two of them.
- The average amount financed for a new car was a record $28,711.
- The average new vehicle payment was $488, also a record.
With loan amounts at record highs, more drivers are leasing cars – 31.46 percent, according to Equifax.
Who is Getting These Loans for Which Cars?
The sub-prime, long-term loans are going to sub-prime customers: those with credit scores under 620. It’s no surprise that these car buyers are the ones at the highest risk of being unable to pay back the loans. Zero Hedge determined that the most popular new car model for sub-prime car loans was the Chevy Cruze, which comes in Turbo Diesel and Eco models.
Educate Yourself About Car Loans
Zero Hedge blog monitors many different financial indicators and facts. Over 98 percent of all credit given in the second quarter of 2015 was for student and car loans, according to Zero Hedge analyst Tyler Durden (a pseudonym). Few car buyers are likely to know about the common practice of car dealers adding at least one percentage point to interest rates financed through their dealerships. They are legally allowed to add up to 3 percent interest, which makes up most of their profit on car sales. Secure your loan through a reputable financial institution before you head to the dealership and avoid the hidden financial markup and fees. Check out our other car financing tips as well!