Sub-prime Car Loans – The cause of the next recession?
It’s true that we’ve seen some positive growth in auto sales, even though we’re still finding the economy in and of itself in a bit of a lull. However, after a little research, the small boom in car sales will probably be coming to a close. The overhaul in the industry did show some promise in keeping some of the largest plants alive, resulting in more people buying cars, we’re seeing a change of trends here. The current trend is sub-prime auto loans and the market seems to be shifting heavily here.
It could be a bit misnomer to call it a trend. It’s more like sub-prime auto loan and lending companies reverting back to the way that they did during the years 2000-2008. This is thanks in part to the amount of stock that the automakers are carrying; they need to move them, so they’re essentially just putting people in cars to keep the ball rolling. Loan companies, hedge fund managers and bank managers are currently selling sub-prime car loans to people who are in need of a new vehicle.
Unfortunately, this isn’t a problem just relegated to the US. In fact, you’re seeing it in places like Canada, Mexico and a variety of other countries. As such, it’s imperative that people take stock of this and compile a plan to balance out the demand and revert to better business practices.
It’s unfortunate that many people saw this coming. For example, Business Week said it best last fall when they stated, “as the fifth anniversary of the Federal Reserve’s policy of keeping interest rates near zero approaches, the market for sub-prime auto loan borrowing is again becoming frothy, this time in the car business instead of housing.”
In fact – as recent as last year – special finance car loans comprised more than 27 percent of all new vehicle loans in just the first six months. This was actually the highest proportion since Experian Automotive began aggregating the data since 2007. These loans are taken from the organizations and re-purposed into bonds and sold on the market.
By 9 months into 2013, these bond sales went all the way up to 17.5 billion dollars. This is double the amount sold in 2010 and just 3 billion dollars than it’s highest point in 2005. Analyst of Morgan Stanley, Adam Jonas, stated “Perhaps more than any other factor, easing credit has been the key to the U.S. auto recovery,” wrote to the various investors in a note sent in October of last year.
As of last April, there are more than 6.6 million auto borrowers, according to Equifax. They also state that this number is only going up. This coincides with a reasonable assumption – so is the number of personal bankruptcies and defaults, as well.
The worst part is the implied maliciousness on the behalf of the capitalist. Everyone needs cars to do what they want to do, so they know that they can get away with charging between 10 and 20 percent interest on their sub-prime auto loans. This is in the face of an industry that usually expects that a quarter of people taking out the loans are going to go into collections or default on their loans.
We’re seeing about three and a half million cars parked in dealerships, a number which is rising exponentially. What’s interesting is that these vehicles are already counted as sold by manufacturers, bringing upon much pressure on the local dealerships, as they have to reach quotas.
Market share is everything here. These loans are creating an overflow in production, mostly due to the auto companies wrangling for it. According to Mike Jackson of Auto Nation, U.S. dealers have about 100 billion dollars worth of vehicles on their properties. This is interesting because he’s saying something very telling; whereas the common level of stock is at 60 days, dealers are moving cars a lot slower, operating at 90 all the way up to 120 days.
A production analyst of IHS Automotive, Joe Langley, echoed similar sentiments. While all of these car companies are looking for people with deep pockets, they’re not getting them through the doors. According to somewhat modest projections, companies should be selling about 19 million cars – but they’re not. They’re currently at 15.6 million – according to figures in 2013 – and they’re looking for more with improvement of the economy.
We have a lot of past history to go on if you look at the past. Past recoveries obviously depended on employment and income fueling auto sales, and when they come back, so do sub-prime auto loan sales. That hasn’t happened here. Things are assuredly different; we haven’t been in a position 5 years after recovery where the last peak in was still a million jobs shy. This makes the problem worse, as you need a job to buy a car.
Even though we may be near overproduction, investors are still pining to expand. At the annual Detroit auto show in January, Honda, Mazda, Nissan and Volkswagen stated that they were looking to open up more factories in the North American continent. Ford, GM and Toyota stated something similar – but working within what they’ve already built.
Shades of the Great Recession
What we’re looking at is the big sub-prime auto loan companies and dealers forcing their wares on the lots, stressing the dealers to accommodate as their stock rises to astronomical levels. These deals go to the dealers who specialize in sub-prime auto loan lending to bolster sales, and investors – be it banks or hedge funds – to find the lenders to make some money. It’s effective until it all falls down. When that happens, everyone pays.
People start losing their jobs, homes, their own cars as well as everything that they’ve built. They then join the ranks of the millions who don’t have a job.
The thing about it is that we’re seeing most of the same cast of characters behind it all. Citigroup, Ally, Blackstone, Wells Fargo, Capital One, Goldman Sachs, as well as a plethora of others who contributed to the mortgage crisis of 2007 and 2008.
It’s all in a days work for the bankers and capitals. They have to make money and a lot of it. While some people point to greed, it can also be stated that they’re under pressure of a lot of their jobs being replaced by software, robots as well as the current state of the economy. So, they have to target the working class and give them “attractive” sub-prime auto loans to garner high profit rates. This is all a charade; they’re attempting to relieve some of the stress that overcome the threat of overproduction.
They’re also creating a disgruntled working class who simply won’t take it much longer. People are starting to pay more attention to the rampant systematic abuse on the part of banks, auto bosses, as well as the investment sharks out there who seem determined to keep them down. Valley Auto Loans seeks to provide sub-prime auto loans in an ethical way that always benefits the customer.
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