We’ve Pulled As Much Future Demand Forward as We Could

Perhaps more than anyone else, we’ve been keen on documenting the rise of subprime auto loans.

Over the course of the last 12 months, data from Experian clearly shows that underwriting standards are falling in the industry as competition for a shrinking pool of eligible borrowers heats up.

  • Average loan term for new cars is now 67 months — a record.
  • Average loan term for used cars is now 62 months — a record.
  • Loans with terms from 74 to 84 months made up 30%  of all new vehicle financing — a record.
  • Loans with terms from 74 to 84 months made up 16% of all used vehicle financing — a record.
  • The average amount financed for a new vehicle was $28,711 — a record.
  • The average payment for new vehicles was $488 — a record.
  • The percentage of all new vehicles financed accounted for by leases was 31.46% — a record.”

Source:http://www.zerohedge.com/news/2016-01-14/subprime-auto-canary-deutsche-bank-probes-employees-exaggerating-abs-demand

As you read through the data above, it becomes obvious that something has gone seriously wrong in our economy.  To finance a vehicle for 84 months-7 years to you and I, is phenomenal.  The rate of depreciation on the vehicle nearly guarantees that the owner will be underwater for nearly the entire length of the loan.

Remember the good old days when your neighbors had a new car every 2 or 3 years?  Those days are long gone.

In an effort to stimulate sales and vehicle loans, Auto dealers and banks have joined forces to get buyers not just from next month into the showrooms to buy, but buyers from next year.

But if these buyers are underwater, they are now more or less locked out of another vehicle for the life of this loan. The longer and longer we lock these buyers are locked out, the weaker future demand for vehicles will be.

So the dealers and banks will have to extend even further.  A vicious cycle that will only end in one way.

One again, I come to the same conclusion.  We have stimulated our economic demand beyond the point of no return.

This next recession will not be like anything you have ever seen.  It will be worse than any is predicting.  There is hardly any demand left to pull from the future into today’s economy.

Too much easy money has added too much capacity which has to be eliminated.

This will not be pretty.  Be prepared.

 

This entry was posted in Economy, Federal Reserve, Finance, Jobs and tagged , , , by EJ Moosa. Bookmark the permalink.

About EJ Moosa

EJ Moosa believes that a smaller government is a more efficient government.

He believes that better analysis leads to better solutions. A graduate of Georgia State University In Business Administration, EJ grew up in Cobb County graduating from Osborne High School and worked at several Atlanta companies including First Atlanta, IBM, and Six Flags over Georgia.

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