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Auto Bubble Coming?

August 29, 2014
Plain English Version

auto bubbleThere was a savings bank bubble in the 1980s. There was the dot.com bubble around 2000. There was the sub-prime bubble six years ago. What is next?

Experts are afraid it may be auto loans. Auto sales now are as high as they were in 2006. New car sales may hit 16.5 million this year.

The lower the credit score, the higher the interest rate.

Interest rates for the best borrowers are very low. The rates are driving new and used car sales. Borrowers with good credit scores are getting good deals. Their interest rates are very low.

Those with poor credit scores are also buying as the economy improves. They get higher interest loans from finance companies. Bond buyers are buying these loans from finance companies. It is the same road traveled in the housing crisis.

Borrowers with low credit scores are paying sky-high interest rates. Wells Fargo lent one fellow $15,197 for a used Mitsubishi. He has declared bankruptcy. He lives on social security. He said he earned $35,000. He did not say he has not worked for 30 years! The car has been repossessed.

There is a surge in lending. There is a lack of caution.

Maybe the auto bubble is not as dangerous as the housing crisis. Cars cost less. They are easier to sell. People may get in trouble but the economy may not.

Still, the government has sent a warning. It is a good test case of whether oversight will be listened to.

Source: The Washington Post

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