Wednesday, July 1, 2015

"Underwater" Car Loans Grow ... DEBT Issues Abound

Car buyers have been able to buy more expensive cars by taking out longer loans. That's creating more burdensome debt obligations for individuals.

And as interest rates continue at record lows, the 'easy' monthly car payments become even easier to make. That results in higher individual debt levels as well.

And here's what's wrong with that higher debt --- the assets, aka the cars, aren't worth anywhere near what the buyers owe on them.

Loose Car-Lending Practices Trouble a Regulator describes the situation and its troubling outlook for "underwater" buyers:

"A bank regulator is flagging concerns about loose car-lending standards . . . .

Long repayment periods and loan balances that are significantly higher than the cars’ value were among the top car-financing issues flagged by the Office of the Comptroller of the Currency in a report it released Tuesday morning. The report expresses concerns that lenders are too focused on making monthly payments manageable for borrowers—while allowing loans to be structured in a risky manner that could lead to losses for the lenders in the future.

“Too much emphasis” on monthly payments, coupled with the fluctuating value of the cars that are financed, “can increase risk, and this often occurs gradually until the loan structures become imprudent,” the OCC report states. “Signs of movement in this direction are evident,” it says.

Repayment periods in excess of six years—once a rarity—are becoming commonplace. Longer payback periods allow for lower monthly payments, making a car that wasn’t within a borrower’s reach seem more affordable. Sixty percent of car loans given out in the fourth quarter of 2014 had a repayment term of at least 72 months, according to the OCC, which cited data from credit-reporting firm Experian. Longer repayment periods are becoming “the norm rather than the exception,” the report says.

Another new norm: car loans that exceed what the car is worth at the point of purchase. This can occur for several reasons, including when borrowers make low (or no) down payments and when they sign on for extended warranties or extra insurance and wrap those add-ons into the loan amount.

Another scenario: when borrowers trade in cars on which they owe more than they are worth and the difference is rolled into the loan on the new car.

Such car buyers leave the lots underwater, owing more on their car than it is worth. And that situation often worsens with time since most cars lose value the more they are driven.

The OCC says it is seeing this issue the most with used-car buyers, in part because they are more likely to trade in a car on which they are underwater. On average, car loans for used cars purchased in the fourth quarter of 2014 were 37% greater in dollar amount than the car’s value.

Separately, subprime borrowers tend to be more underwater than creditworthy buyers, according to the OCC report. Borrowers with a credit score below 620 who financed used cars at the end of last year received loans were nearly 50% larger than the car’s worth on average.

The OCC last reported on car loan issues in October when it highlighted an increase in the average loan size that lenders were writing off as losses on car loans that weren’t being repaid. It raised the issue of loans that exceed cars’ values as well.

Car-loan lending has taken off over the past few years, fueled by a mix of pent-up consumer demand and loosening standards. Unlike mortgages, car loans have become easily accessible to borrowers with low credit scores, for example. Outstanding balances reached $956 billion at the end of 2014, up 8.8% for the year, according to the OCC’s report, which cited Federal Reserve car-loan balance data."

Summing Up

Consumer debt is way too high.

And in a non-inflationary economy where getting a good job is tough, getting a raise is even tougher, and part-time employment status is more and more the norm, the ability of car buyers in particular, and consumers in general, to service their debts has become tremendously difficult in today's slow growing economy.

If we throw in record high student loans, onerous and costly credit card debt, and the "underwater" home mortgages, then the troubling financial picture for American consumers is complete.

No, it's not just the good citizens of Greece and Puerto Rico who are at risk financially.

In fact, we have a long term term debt workout period ahead of us right here in mainland America as well.

At least that's my take. What's yours?

Thanks. Bob.

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