In the fourth quarter of last year, the number of Americans paying $1,000 a month or more for a vehicle hit a record high of 15.7%. Today roughly two out of 13 people have committed themselves to these payments. And many of them are doing it after trading in cars they’re underwater on – owing more on them than they’re worth. That negative equity gets rolled into the purchase of the new vehicle.
“Ultimately if your equity is negative enough and you’re under enough financial distress, you’re going to eventually default on your automobile loan and the car will be repossessed,” says Pete Kyle, Charles E. Smith Chair professor of finance at the University of Maryland Robert H. Smith School of Business. He adds, “the negative equity might be one of the factors pushing the delinquency rate up.”
Bloomberg reports in January severely delinquent auto loans hit their highest rate since 2006. “In the last few months, you’ve seen a skyrocketing of late payments on loans from these ridiculously low levels that have never been seen before. But the worrisome thing is, is this going to continue? Are we going to see an even further transition into really high levels of delinquency on automobile loans?” Kyle says, “if we do, it’ll probably be associated with a recession.”
American car buyers are paying an average of roughly $49,400 to drive a shiny new vehicle off the lot. The Manheim Used Vehicle Value Index shows used car values fell in January but climbed in the first half of February. It was the largest such increase for that month since 2009. These prices are leading many consumers to put more money down on a car. The average down payment for new and used vehicles hit record highs last quarter, climbing to nearly $6,780 and over $3,921 respectively.
This overstretching of budgets and the other issues consumers are dealing with when it comes to car buying, appear to make up at least some of the ingredients in a recipe for recession. “I think so,” says Kyle, “that’s probably what’s happening.” For now, he feels the strong labor market is one of the main factors keeping an economic downturn at bay.
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