Car loan defaults are rising and are now higher than ever. The numbers are staggering. They even exceed the peak of car default that occurred before the 2008 financial crisis. What is causing this new rate of default and what can we expect in the future?
Nothing is worse at creating car loan default than horrible loan agreements. Statistics show that loan agreements entered at high-interest rates have a higher rate of default. This is due to two things. First, the higher-interest-rate loans usually require a higher monthly payment. This increases the total cost of the vehicle, regardless of the vehicle’s age or quality. Secondly, higher-interest-rate loans are usually given to “poor credit” borrowers who already have a more likely default potential.
Even though more jobs are available in the current economy, this does not guarantee that monthly bill payments will be made. With the limited availability of real estate, most rental are mortgage payments are sharply increasing. Being employed does not guarantee that you can make payment for all of your bills. What it does virtually guarantee, however, is the availability of a car loan! Strong economies create greater availability of credit. Bad credit deals create increased defaults.
With record-breaking default on auto loans, some may expect an epic collapse of the economy to occur similar to 2008. However, it is very likely that much more expansion of the economy through credit must occur before this will happen. Before the previous crisis, the real estate market was elevated for some time. This created the expansion of housing through never-ending new housing projects. Although the increasing default of car loans is a bad sign, the debt-based, credit economy will likely need to expand quite a bit before it once again collapses.
Expect housing projects, free and open credit, and expansion of the economy to continue before any epic-style collapse once again occurs. In fact, default on loans may only be a sign that the open expansion of the economy is occurring once again. The inevitable collapse will likely only happen once it reaches this current expansion’s maximum.