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Auto Loan Bubble?

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Auto Loan Bubble?

The housing market crashed when people started defaulting on their loans – which is exactly what’s been happening with auto loans..

A Requisite Press report from 2016 found  almost 3/4 of Americans consider new cars and trucks to be unaffordable..   The average household can only afford ½ the price of a new car.   This tends to increase auto loans.

The number of delinquent auto loans is on the rise — and the proportion of auto loans held by people with poor credit is also on the rise, as the Federal Reserve reported.

What is causing the high cost of auto financing and leasing?

  • Cars are not seen just as a means of transport
  • Cars are a status symbol.
  • This explains how frequently the cars are being bought and sold.
  • 5 years back, the ownership cycle of a car was around 7 years.
  • The ownership cycle is now 4 years, and market analysts believe that by 2021 the period might come down to 3 years.”
  • Often consumers buy a new car in order to get out of a car loan they are “upside down” on a previously car.  Result is borrowing more on a new car to payoff old car loan.

It is not surprising that Americans look at cars as a status symbol.  However, as Americans fall deeper in debt, they are still looking to change their cars more frequently.

The number of delinquent auto loans is on the rise — and the proportion of auto loans held by people with poor credit is also on the rise, (reported by the Federal Reserve)

With the decreasing timeline that Americans keep cars,  used cars are of good quality rather than a “junker”  that has reached their end of the road.    Buying a used car may be a great value for your money.

How to protect yourself from an auto bubble?

  • Consider  how much you can actually afford to pay off.  
  • If your income decreases, you will still be able to  afford your car loan.
  • Look at the auto lease or loan terms very carefully.    At the end of the lease, what will your vehicle be worth and what did it cost you?
  • Do not make an impulse buy – review carefully (About 42 percent of auto loans now last 6 years or longer — which cost more over the long haul)
  •  Look at the interest rate not just the monthly payment.

As people look to change cars every three years, a good used car may be a great option.