The Subprime Auto Loan Bubble Is Beginning to Burst

Americans currently hold one trillion dollars in consumer auto loans – and with many subprime loan holders beginning to default, top auto lenders are preparing for millions of dollars in losses.

Studies show Americans are borrowing more than ever before to purchase new and used vehicles. The percentage of Americans with unpaid subprime auto loans has reached a new high, too – 5 percent – surpassing rates seen during the Great Recession in 2008. In fact, this is the highest rate of delinquent subprime car loans on record since 1996.

The average size of an auto loan is also at a record high of nearly $30,000. This is largely due to lenders’ recent practice of stretching loans out to as many as seven years. Even so, average monthly payments have nearly hit the $500 mark.

Although these economic indicators are worrisome, experts say it won’t get as bad as the subprime mortgage lending crisis. Consumers who can’t pay their auto loans won’t be left homeless, as in the mortgage crisis, and most understand that vehicles lose value over time anyway, unlike an investment in a home.

Large lending institutions are expected to be able to weather the losses. However, it’s likely that some smaller institutions may be forced to make temporary layoffs until the auto loan market begins to recover.

Image via Flickr/christophhaberthuer