Automotive debt is a cause for concern among lenders

Student loan debt may be the topic du jour. But it’s not the only bubble that Americans should be worried about in the next few years.

Americans have managed to reduce their debt since 2008. But auto loans have continued to grow at similar rates as student loans. Combined with student loans, auto loans have contributed to 90 percent of consumer debt growth since 2012.

The average outstanding auto loan debt per person is approximately $12,000 per American. That figure is nearly 8 percent of the average disposable income. Outstanding car loans have now reached over a trillion dollars.

By comparison, student loans sit at $1.3 trillion outstanding.

Part of this issue has come from the number of subprime auto loans issued to American buyers. In fact, subprime loans have grown faster than the regular auto loan market. Approximately 23.5 percent of all new auto loans were classified as subprime in 2015.

Although this is a large number, it does not necessarily mean the bubble is about to burst. However, the number of rising defaults and delinquencies are causing concern.

Still, car title loans are not the risk they used to be. New technology has made it easier than ever to repossess vehicles. Some subprime loan underwriters require cars to come equipped with devices that allow the lender to disable the ignition.

The number of vehicles with a GPS installed also makes cars more accessible should the lender fail to make their payments.

But there is still another reason for concern for the automotive industry. Subprime loans tend to keep people driving the same car for a longer period of time. The terms could keep buyers off the market longer than anticipated. A slowing automobile demand could hurt the whole industry, which would have an effect on lending.

The scenario remains complex and unpredictable. However, the risks of a burst bubble are real. The key is not looking for recovery in the number of vehicles sold every month. Rather, industry insiders and the government should look for a reduction in consumer automotive debt.

After all, when consumers have more money in their pockets, they have more money to spend on new cars.

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