Underwater Car Loan?

May 11, 2020 by

vehicle financingRemember subprime mortgage lending, no-doc mortgage loans, mortgage-backed securities, credit default swaps, derivatives, suspect credit ratings, the housing value plunge, the 2007-08 financial meltdown, and foreclosures galore? Yikes, that makes your gut tighten, doesn’t it?

Subprime Auto Loans Have Boomed

Fasten your seat belt: next coming down the pike may be a meltdown in subprime car loans. See this MarketWatch article for more, but in short: risky lending on a massive scale may once again be jeopardizing the economy for all of us.

“Subprime” means borrower’s credit scores are less than 600. Total U.S. auto loan debt now exceeds $1 trillion. An estimated 22% of auto loans are subprime. Twenty percent of subprime auto loans are delinquent at least 60 days, and this fraction is trending up.

Underwater Auto Loans

In theory, a debt crisis isn’t possible unless a significant proportion of loans are underwater: the loan balance exceeds the underlying asset’s value, in this case the value of the car financed. With cars of course, many loans are underwater the minute the car is first driven off the lot, and the car instantly depreciates about 10%. If the loan weren’t underwater, then presumably the borrower could simply turn the car over to the lender and be off the hook. (This too is problematic, however. Read “Does Repossession Cure Debt?“)

Is your car loan underwater?


Underwater Car Loan Story

This infographic will help you get the underwater car loan picture, and offers tips on avoiding an underwater loan in the first place but also getting your financial head back above water if needed before you drown. One comment on the ideas offered: In general, taking on more debt is rarely a wise solution to a debt challenge. (Read “Debt Doesn’t Cure Debt!)

underwater car loans

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