In July last year, I pointed out that the US vehicle manufacturing industry was in serious trouble. In a second post the same day, I provided pictures of vehicles that could not be sold, stored in hurriedly rented parking lots all over the country.
The hurricanes that struck the US during the second half of last year provided an unexpected breathing space for the auto industry, with over 600,000 vehicles damaged or destroyed. Many had to be replaced. This absorbed some of the industry's overproduction stockpile, and staved off short-term problems. However, the "weather bump" is over, and the problems are returning in full force. Bloomberg reports:
Growing numbers of small subprime auto lenders are closing or shutting down after loan losses and slim margins spur banks and private equity owners to cut off funding.
. . .
As of the end of September, there were about $280 billion of subprime auto loans outstanding, according to the Federal Reserve Bank of New York ... There isn’t a standardized definition of subprime borrowers, though it generally encompasses borrowers with FICO credit scores below 600 to 640 on an 850 point scale.
Years of loose lending have resulted in growing numbers of subprime borrowers falling behind on their bills. In the quarter ended September, 9.7 percent of loans that auto-finance companies made to the riskiest borrowers were overdue by 90 days or more, according to a study last year by the New York Fed. That’s the highest percentage since 2010. The weakness is making it more expensive for some subprime auto lenders to package loans into bonds, though none of the companies that recently closed or filed for bankruptcy have issued such securities.
It’s a cycle the subprime auto industry has seen before. From 1997 to 1999, 41 lenders filed for bankruptcy, shut down or were acquired as losses from bad loans piled up, according to Moody’s Investors Service.
For this cycle, easy money may have spurred lenders to be looser in their underwriting or fail to properly vet borrowers’ incomes, said Colonnade’s Gillock.
There's more at the link.
Last year I pointed out:
Put in its simplest terms, most US households currently have significantly less disposable income, in terms of the buying power of their money, than they had in previous decades. Therefore, while auto prices may have held reasonably steady in inflation-adjusted dollars, the incomes of those who buy them have not. They're now effectively much lower.
. . .
That's why the duration of auto loans has had to increase. People no longer have sufficient disposable income to afford both their normal living expenses, and the monthly payments on that auto loan over a more 'conventional' term. That's also why many US cars are now sold through short-term leases rather than auto loans - because loan payments are simply too high.
Again, more at the link.
Now it seems that, for many consumers, even the longer-duration consumer loans they took out to buy vehicles are too much for their budgets to bear. This will have an immediate knock-on effect in the auto industry. If its products can't be afforded by many consumers, it won't sell as many, meaning a lot of the infrastructure (and staff) built up to support a given market size will now be surplus to requirements. That can't be a comforting feeling for those working in that field.
Miss D. and I decided long ago that we were going to get off the merry-go-round of taking out loans to "buy stuff". We're staying as debt-free as possible, and pay for most of our needs in cash. We're even trying to pay off our home in ten years or less. If we need another vehicle in future, we might consider financing it, but unless the need is very urgent, we're more likely to save our money and pay cash. I know several families who've made similar decisions. That's even more bad news for the finance companies who issue auto loans.