Thread by @GrahamStephan

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.

https://twitter.com/GrahamStephan/status/1542860348742836225

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