Auto Loan Bubble, Subprime Defaults, and Debt Crisis Uncovered



Hi my name is Brian Kehm I'm with Frugal Fortunes
and today I'm going to be discussing the auto industry. More specifically, there's been
a huge run-up in auto loan debt this has lead to a bubble and with any bubble or crisis
comes opportunity. I'll get to that in a minute but first, I'd
really appreciate it if you tapped the like button down below. It means a great deal to
me. Alright so first I want to show you a chart.
I'm going to go ahead and put it up on the screen. The blue shows that total auto loans
have gone from about $700 billion to $1.16 trillion dollars. The other line in red shows
interest rates. As interest rates have decreased, it's made cars or car loans more affordable. On top of that, many Americans have bought
above their means. Car financing units have made it very easy for consumers to buy cars.
For example, Ford last year reported $46 billion dollars in its total loan portfolio. A lot
of times they'll offer zero percent financing for ah 36 months but with a frugal mind, we
already know that the incentive is already baked into the price. Now, interest rates have been climbing over
the last few years and this is putting downward pressure on new car sales. This second chart
that I have for you it shows what I just talked about. The Federal Funds rate has been climbing over
the last few years. It went from zero in 2015 ah to about 2.4% at the start of 2019 and
now it's kind of leveled off. The Federal Reserve stopped hiking interest
rates but the damage is already done. New car buyers are paying 6.19% for a five year
loan today and about a year ago it was only 4.99%. Average new lease payments have climbed from
$436 dollars in Q1 2018 to $457 dollars in Q1 of 2019. That's not a big bump but still,
ah there are lots of Americans that are struggling to make ends meet. And this is putting pressure
on them and it's leading to defaults. This pay bump is more drastic in the subprime
loan market. Subprime and deep subprime make up just over 20% of the total auto loans outstanding.
They've gone up $22 dollars and $43, respectively in a short amount of time. Once again, that
puts a lot of stress on consumers. But what's the silver lining here? Well, as
we see this bubble expanding, we know there's going to be a contraction. Ah more defaults
are coming and this is going to lead to a great opportunity. I expect the price of used cars to drop over
the next few years. So if you're in the market to buy a new car and it's not urgent, it might
pay to wait. At the start of 2019, auction volume dropped by 10.4%. Already, we're starting
to see downward pressure on used car sales. And the auto industry as a whole is undergoing
a lot of big changes. A lot that I'm very excited about. Part of the American dream used to be buying
your own home. Buying your own car. Ownership. Although, times are a changing. The sharing economy is taking its toll. With
easy sharing apps like Uber, a lot of Americans are starting to opt out of buying an expensive
car. Cars are the second most expensive asset that you might buy. Although, they sit around
for 95% of their life in garages and parking lots not doing anything. So the sharing economy
helps us to be more effective with some of the assets that we own or now share. The auto industry is just set for a lot of
disruption and one other area that's starting to be disrupted is auto dealerships. Auto
dealerships are protected by politicians. Politicians spend a great deal of money making
sure that consumers have to go through dealerships to buy them. Although, as a consumer this
is terrible. It can add a thousand dollars plus to the price of a new car. Although, thanks to innovators like Elon Musk
and Tesla, they're fighting those old rules. Old consumer unfriendly rules. They're trying
to push direct sales from manufacturers to consumers. As that change comes that's a benefit
to the consumer and it should help low prices. Overall, the future looks bright for transportation.
I'm really excited about autonomous vehicles that are starting to hit the roads. They're
a ways off but it's just another area where consumers will benefit. In fact, I've done
research over over 5 years on autonomous vehicles and I'm going to link down below to 25 pros
and cons of a driverless future. So you might want to check that out. I really appreciate that you stopped by today.
Once again if you could hit the like button I'd really appreciate it. I'll be putting
out more research soon. I look forward to seeing you next time. Bye.

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