The used car market is on the brink of an auto loan collapse that can shake the entire industry.

I am shocked that more people are not talking about this!

We are facing a 2008-ish scenario in the used car market and honestly, it's a disaster waiting to happen.

A 🧵
When buyers purchase a car, a vast majority (~85%) are financed. The problem is that, unlike real estate, auto loans are not subject to strict underwriting requirements allowing almost anyone to get one.

Buyers with lower credit scores were funnelled into loans with 2x interest!
You can see how crazy this is in the latest auto loan consumer reports.

- 25 to 50% of the loans were given to customers who might not be able to repay it

- Lenders only verified the source of income and employment only 4% of the time
If that's not crazy enough, as of now, 5% of Auto Loans are behind payments and nearly half of them are underwater!

Just like how the housing market collapsed from the loan crisis in 2008, the same thing is said to be starting to happen in the Auto Loan market.
As the supply chain and chip crisis has improved from COVID times, used car prices have dropped for 4 consecutive months & are now down 6.4% since January.

This is a nightmare for the banks that have lent money on these cars, whose value is rapidly beginning to fall.
Just recently, Equifax reported that 8.5% of subprime borrowers defaulted on their car loans - the second-highest on record!

WSJ also found that more subprime borrowers have started missing out on payments as rising inflation made them choose between essentials & auto loans.
The reality is that lenders have given buyers unaffordable loans without verifying their financials on car values that cannot be sustained without a chip shortage.

It's only a matter of time - eventually, things have to come back to normal.
KPMG predicts that used car prices can drop 30% as more supplies hit the market and Ally Financial predicts a 20% drop.

The timing is a bit uncertain but it looks like it's going to unravel in the next 12-18 months.
From everything that I have researched, my biggest concern is that too many people have locked themselves into auto loans that are more expensive than they can afford.
If any of them experience a job loss or reduction in income (like in a Recession), they will not be able to sell the car for as much money as they owe due to the crashing auto prices.
There will be no choice left other than to get their car repossessed flooding the market with inventory and exacerbating the issue.

This is especially true now given more than half of auto loans are underwater with people owing an avg $3700 more than their vehicle is worth!
The only silver lining here is that auto loans are significantly smaller than housing loans and it's much easier to repossess and auction a car when compared to a house.
My concern is that very few people are acknowledging the issue...

The more people understand what's going on, the more we could prevent the problem from getting worse!
Let me know what's your take on the auto loan crisis! Please help in spreading awareness by liking and retweeting the first tweet in the thread.



Follow @GrahamStephan for more content that'll make you a smarter investor!
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More from @GrahamStephan

Jun 29
Celsius has been in the news a lot of late.
For all the wrong reasons.

The gist of it can be summed up by this pic.

And some of my money is stuck there too...

How did the little guy's alternative to the "big bad banks" become an investor's nightmare? 🧵
Alex Mashinsky founded Celsius on two stories:
1. Banks give you a small piece of the pie
2. @Celsius is the answer

High rewards for little risk.

But banks are able to generate interest on deposits using leverage because they have some diversification.

What was Celsius doing?
@celsius Celsius let you borrow money against any of 40 different cryptos, and using their EARN feature, get 1 to 12% yield.

Cool, right? Not quite.

The high yields meant they paid out nearly 80% of the money they were making.

(@coffeebreak_YT has a great video on this)
Read 12 tweets
May 4
I thought it was going to be a normal week.

Then I was hit by the news that the US GDP fell by 1.4% in Q1 of 2022.

One more quarter of negative growth and it's a recession.

Here's how to prepare ahead of time and make the most of the situation!
Recessions are hyped as catastrophic - falling stocks, rising unemployment - but the reality is different.

A recession is based on GDP - The net market value of goods and services.

A rising GDP implies growth. A falling GDP is a sign that people are spending and producing less.
Two consecutive negative quarters of GDP, and we have a recession.

But it's not even that rare!

We've seen 12 recessions since the 1940s.
The longest was 18 months.
The shortest during the COVID lockdown lasted just 2 months.
Read 12 tweets
Apr 27
Index funds have been the safest investment option ever.

Except now, Michael Burry is saying there's an Index fund bubble.

Even Jack Bogle, the creator of Index Funds, warned against it!

Here's a breakdown of the bubble - and what it means for your money. 👇
What's an index fund? It's just a basket of stocks you can buy to diversify risk.

Instead of YOLOing on a stock you found on WSB, you can buy $SPY and own a piece of the top 500 companies in the market.

There's an index for everything - From Gaming to Cows to even Obesity!
But the better part is that while reducing risk, they are also very profitable.

95% of portfolio managers underperform $SPY over a 15-year period. Even Warren Buffett promotes $SPY over his own company!

The cash inflows to index funds have been skyrocketing for this reason.
Read 11 tweets
Apr 21
The average American household has $10k in savings.

By keeping this in a checking account, you lose out to inflation.

But with just a 3% return every year, you could double that amount in 25 years!

Here are 6.5 ways to invest that amount and make it work for you:
#1 Start an emergency fund

I know... I said you lose out to inflation keeping your savings idle

But it's insurance. By keeping cash for emergencies, you don’t need to disturb your investments

Imagine selling your stocks during the Covid crisis only for them to bounce back 50%!
#1.5 Short term goal fund

Also, it’s a good idea to save for specific goals.

If you want to buy a car or a house in the next 1-4 years, you shouldn't invest the money you need for that.

Keep that money aside so that you can let your investments grow untouched!
Read 10 tweets

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