Auto sales slow while underwater car and equity loans rise

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The United States car industry was on a rally for the past seven years, with the sales streak-snapping in 2017. Auto sales started to increase in 2010, as the recession weakened and allowed consumers to pursue new, more economical vehicles. Two years of record sales followed with a steady rise in sales over the seven-year period before 2017.

Figures have just been released for 2017 sales that show sales fell 1.8% compared to a year prior, with sales hitting 17.2 million. Consumers are keeping their vehicles longer and an increase of low-mileage used vehicles also disrupted the industry.

Automakers are still profiting off of the high-priced vehicles. Consumers are now favoring SUVs, trucks, and crossovers, which have higher profit margins.

The decline in sales for the first time in seven years has also opened up another dilemma: underwater loans. Auto dealers are relaxing their requirements, putting many lenders in debt with riskier loans.

Prominent dealerships are also offering car loans to potential buyers. Low credit score borrowers are facing severe risks, too. The industry is offering very high-interest rates on high-priced vehicles to consumers with credit scores as low as 580.

The Drive reports one dealer offering a Stinger GT2 with an interest rate of 11%. Payments balloon to over $1,000 a month instead of pushing low credit score borrowers to more economical vehicles. Consumers that are expecting to trade their vehicle in down the road will find that the high-interest rates put them underwater.

Consumers that trade in their vehicle or sell it will not have enough to pay off their vehicle in many cases. The consumer will often be forced to roll the balance of the loan into a new loan, keeping consumers in debt for longer.

There’s also a rise in car equity loans, leading to consumers taking out money against vehicles that they’ve paid off. Car equity loans work in the same way as home equity loans. Studies show that consumers are expected to increase equity loans by 30% in the next few years.

Reports from January 2018 show that a third of vehicles last year were underwater during a trade in. Riskier lending in the auto industry is to blame, as manufacturers hope to offset slowing sales with riskier debt that is hurting the consumer and may harm the auto industry in the long-term.

Finance companies are at risk of severe losses as more consumers fall into auto debt. The outcome isn’t favorable in the end. Lending volumes for new and used vehicles are hitting near-record highs as sales fall.

More worrisome is the fact that median income growth hasn’t kept up with the average amount consumers are financing for new vehicles. The figures show that consumers are becoming more strained with higher debts and less disposable income.

New business is being targeted by some lenders that are reaching out to borrowers that are less creditworthy. Delinquencies are also on the rise. The New York Fed notes that there is $1.2 trillion in auto debt in the United States.