The Car Market Collapse Is Going To Unleash The Most Devastating Financial Crisis Since 2008

New signs of stress in the ballooning trillion-dollar U.S. auto market are pointing to an impending collapse as storm clouds continue to gather in the economic and financial landscape. Serious delinquencies in auto loans — defined as behind on payments by 90 days or more — jumped the most since the 2008-09 Global Financial Crisis, putting the entire automobile financing market at risk of facing a massive default wave in the coming months. Experts are raising big alarms about the current condition of the car loan sector. They say that millions of American motorists will have their vehicles taken away in the months ahead, and warn about a brewing financial crisis that could reach unprecedented proportions and completely crush the U.S. economy.
Newly “delinquent”, or overdue, U.S. auto loans reached $23 billion and new “seriously delinquent” loans exceeded $8 billion; both are absolute levels not seen since the depths of the global financial crisis, the report shows. Right now, more and more buyers are having difficulty keeping up with auto payments, and a record 7 million Americans are at risk of losing their vehicles for being 90 days or more behind on their loans.
In March, official agencies alerted about the strongest expectation of debt delinquency for people under 40 since the spring of 2020, when 14 million people lost their jobs during the first pandemic shutdowns. That has raised fears of a massive default wave this year because Americans are loaded up on auto loans like never before. At the end of 2022, the total value outstanding nationwide was $1.55 trillion, more than double the amount 10 years ago. Put another way, auto loan debt totaled $4,800 for every person in the country.
Every year, about 80 percent of defaults end in repossessions. But the truth is that the entire market is set up for failure. Some financial analysts even claim that many lenders are ignoring typical reg flags associated with loan applicants who are already struggling to pay their previous auto loan properly.
That is the argument Andrew Schmidt of the University of California, Berkeley, School of Law makes in a recent article. He says state officials, lawmakers, and regulators aren’t doing anything to intervene in the car credit market to curb lenders’ ability to issue subprime loans. Frequently, lenders price cars as high as twice the Kelley Blue Book value, a practice that allows them to “profit from the down payment and origination fees alone.” The subprime loans they issue also carry exorbitant interest rates—sometimes exceeding 30 percent.
While lenders profit from defaults, some borrowers spend decades paying off a car they only drove for a few months. To recoup loan balances, lenders engage in aggressive collections tactics such as lawsuits and wage garnishment. Some subprime lenders have attorneys on staff to keep up with the rapid rates of default.
But the heightened potential for mass debt default of subprime auto loans can send shockwaves through the financial system just like mortgages did in 2008, and Schmidt worries that this can have “disastrous consequences” for the economy. That’s why the auto market crash is likely to hit the poorest households hardest. “Without meaningful intervention, the subprime auto loan bubble is primed to burst,” Schmidt warns. Just like the other financial meltdowns that were fueled by reckless lending and speculation, this crisis will reach proportions most people don’t even imagine. The dominoes are already falling in the financial world, and the automobile market may be the next shoe to drop.