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Remember the subprime mortgage crisis that ultimately resulted in the global financial meltdown of 2008? Bad loans, sketchy financial instruments, and defaults from high-risk borrowers plunged the world into the worst economic downturn since The Great Depression. Lessons were learned and measures have been taken to make sure something like that never happens again – right?

So you’d think, but there’s a reason why we’re bringing up the GFC and it most certainly isn’t good. A Reuters report recently brought some chilling details to light about the current state and trajectory of auto loans in America. Many parallels can be drawn between where said market stands right now and the factors leading to the housing crash nearly two decades ago, which is rather concerning to say the least.

A $1.7 Trillion Market Might Be On The Verge Of Collapse

In short, subprime loans are once again the main headliner, but they’re just the symptom of multiple underlying facets bundled together. Generous stimulus measures and supply chain disruptions saw car prices skyrocketing during the pandemic, so buyers had no choice but to take on more debt to finance their purchases.

Not only were these loans approved over a longer period of time to soften the blow, but the average monthly installment also rose from $550 in 2019 to $765 this year. At the same time, Uncle Sam’s stimulus checks made household budgets and credit scores look better on paper temporarily, prompting lenders to sign off on loans that would’ve otherwise been considered too risky.

Why Is The Market In Such A Bad Spot Today?

Pandemic-era government incentives are now long gone, loans approved during the COVID years are recording late payments at alarming rates, and buyers are left with depreciating assets costing them more than they can afford. Not only that, but your typical vehicle on sale is six years old in 2026 compared to just over three years back in 2019, which translates to higher maintenance and servicing costs on top of loan repayments they can barely keep up with.

And based on data from the SEC, the share of loans expected to reach maturity when the vehicle is more than 12 years old rose from just 5.8% in 2019 to over 30% in 2026. Costly repairs for less dependable cars increase the likelihood of subprime borrowers defaulting on their payments, and that’s not a good scenario for investor funds tied up in asset-backed securities.

CarBuzz Insight – Why This Matters:

If the whole affair comes crashing down, it would have a devastating effect on the auto industry at a time when it’s already under immense pressure. And the ripple effects would certainly go beyond the automotive sector, because a severe downturn in a market worth $1.7 trillion isn’t something the rest of the economy can shrug off like it’s no big deal.

Of course, the consequences wouldn’t be as drastic as those brought about by the GFC, but they really shouldn’t be underestimated, either. The worst thing about this whole predicament is that we might be past the point of no return, too late to course-correct and left with no choice but to brace for the inevitable. Let’s hope that’s not the case, though.

Source: Reuters