History Repeats: Car Loans to People Who Don’t Qualify?

Between the first quarter of 2012 and the second quarter of 2014, auto sales in the U.S. economy have increased 16%. (Source: Federal Reserve Bank of St. Louis web site, last accessed August 21, 2014.) And auto sales this year have been stellar, too. In July, auto sales reached the highest level since 2007 and are up eight percent from this past January. (Source: Motor Intelligence, last accessed August 21, 2014.) 

As auto sales have risen, auto loans have increased as well. In the first quarter of 2012, auto loans amounted to $737 billion; now they are just short of $1.0 trillion. (Source: Federal Reserve Bank of New York web site, last accessed August 21, 2014.) 

More auto sales, more auto loans; sounds right. But the problem is that more and more cars are being sold to individuals with bad credit scores. 

Looking at it percentage-wise, the amount of auto loans to people with poor credit scores is much higher than to those with good credit scores. As an example, in the second quarter of 2014, $20.6 billion in new auto loans were issued to those with a credit score below 620. That’s an increase of 33% to this group from the first quarter of 2012. 

Meanwhile, auto loans to those who have credit scores above 760, called super-prime customers, only increased 17% over the same period. 

Now, here comes the kicker… 

In the second quarter of 2014, 15.1% of all auto loans originated in the U.S. economy were delinquent for more than 30 days. That’s a 44% jump in auto loan delinquencies from the first quarter of 2012. (Source: Federal Reserve Bank of New York web site, last accessed August 21, 2014.) 

Auto sales increasing on borrowed money and more Americans becoming delinquent on their auto loans doesn’t sound like the right equation for an economic recovery. In fact, it’s the opposite. You’d expect a 44% rise in auto loan delinquencies when the economy was contracting. 

Remember when house loans were made to people who didn’t qualify? Now, it’s car loans to people who really shouldn’t be able to get the loan. 

For the U.S. economy to march ahead, you want to see the standard of living of the average American Joe rising. But if he is drowning in debt and can’t afford to make his car payments, that’s a big problem. As I wrote earlier this week, consumer sentiment is tumbling. (See “Two Important Economic Signals to Share with My Readers This Morning.”) 

What’s happening with auto sales is only a small part of the weak economy story. And in respect to that stock market that has the Dow Jones Industrial Average over 17,000 again, it’s nothing more than a mirage and a trap for would-be investors. 

This article History Repeats: Car Loans to People Who Don’t Qualify? was originally posted at Profit Confidential