- Headlines flash warnings about a crisis in the car loan market
- But industry expert Jonathan Smoke says the risk is isolated
The headlines are alarming:
Americans are Drowning in Auto Loan Delinquencies, says USA Today.
Auto Loan Delinquencies are Soaring, With Consumers Hit By High Car Prices, says Yahoo Finance.
Warning Sign? 1.7 Million Vehicles Were Repossessed Last Year, says the Texas Standard
The reality may be much less scary. “We see no signs of a domino effect poised to rock the auto market or the economy,” says Cox Automotive Chief Economist Jonathan Smoke.
Cox Automotive owns Kelley Blue Book
Related: It Grew Harder to Get a Car Loan Last Month
A pair of recent bankruptcies has shaken investors’ confidence. Subprime lender Tricolor declared bankruptcy amid allegations of fraud last month. Tricolor specialized in “buy here, pay here” car sales — used car sales without a credit check, often servicing communities with many undocumented immigrants.
A second buy-here, pay-here lender, PrimaLend, also declared bankruptcy.
The two don’t presage a wave of trouble, Smoke says.
Outside Buy Here, Pay Here Lots, Loans Are More Stable
- Loan defaults are down year-over-year
- Outside the buy-here, pay-here market, signs are more stable
“While these two bankruptcies can’t be ignored, they are anomalies and not an indication of systemic trouble with lending.”
Delinquencies have been high for three years, he says. Inflation, the return of student loan payments after a long pause, and record-high monthly payments from pandemic-era car price spikes combine to stress subprime buyers.
Related: Is Now the Time to Buy, Sell, or Trade-In a Car?
But, he says, “When we look beyond delinquencies, the rest of the loan portfolio remains solid and stable. Historically, auto loan defaults mount when borrowers lose their jobs. We are navigating recent weeks without updated government data, but no indicators suggest that layoffs are accelerating.”
Loan defaults, he notes, peaked last year. “This year has been stable.” Defaults, he notes, are down 9% year-over-year. “If the economy were unraveling, defaults wouldn’t be falling.
“Bottom line: There is stress in the loan portfolio now, but it’s concentrated among lower-income, poor-credit consumers,” Smoke says.
“Tricolor was a cockroach, but sometimes a big one shows up when seasons change, at least that has been my experience living in the South,” he jokes. “That doesn’t mean the house is infested.”
