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Please consider taking a $45,000 Loan for a $27,000 Ride.

Consumers, salespeople and lenders are treating cars a lot like houses during the last financial crisis: by piling on debt to such a degree that it often exceeds the car’s value. This phenomenon—referred to as negative equity, or being underwater—can leave car owners trapped.

Some 33% of people who traded in cars to buy new ones in the first nine months of 2019 had negative equity, compared with 28% five years ago and 19% a decade ago, according to car-shopping site Edmunds.

Easy lending standards are perpetuating the cycle, with lenders routinely making car loans with low or no down payments that can last seven years or longer.

Borrowers are responsible for paying their remaining debt even after they get rid of the vehicle tied to it. When subsequently buying another car, they can roll this old debt into a new loan. The lender that originates the new loan typically pays off the old lender, and the consumer then owes the balance from both cars to the new lender. The transactions are often encouraged by dealerships, which now make more money on arranging financing than on selling cars.

“These aren’t Rolls-Royces,” said David Goldsmith, a lawyer who defends consumers in auto cases. “They’re Ford Escapes.”

Some 5.2% of outstanding securitized subprime auto-loan balances were at least 60 days past due on a rolling 12-month average during the period ending in June, up from 4.8% the year before and 4.9% two years before, according to Fitch Ratings.

Examples to Consider

The Journal cited the case of Mr. John Schricker who kept rolling over loans to the point that it took a $45,000 loan from Ally Financial Inc. to buy a $27,000 Jeep Cherokee.

Also consider the case of Yolanda Finley. She bought a bought a used 2011 Chevy Traverse with a loan of $25,585 from Santander Consumer USA Holdings Inc. in 2014. Finley could not afford the payment. Her car was repossessed. She now owes $27,000 on a car she does not even have.

Nicole-Malia Tennent and Shyanne Fernandez, both in their early 20s, wanted to trade in the car they shared for something less expensive last year. Instead they splurged on a new 2018 GMC Sierra truck, moving the unpaid loan balance of $12,500 into a new loan. The new loan balance is over $66,000. The old loan payment was $500. The new loan payment (I presume for longer), is $900.

What the hell do two friends need a $66,000 truck for? How will they allot the time between them?

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This is how crazy it's gotten.

Three personal anecdotes don't constitute data but other evidence suggests the problem is widespread.

Car Dealers Make More Profit On Loans Than Selling Cars

A third of auto loans in 2019 had a term period over six years. People cannot afford the cars they are buying.

For discussion, please see Car Dealers Make More Profit On Loans Than Selling Cars

Families Go Deep in Debt to Stay Middle Class

On September 9, I noted Families Go Deep in Debt to Stay Middle Class: Revolving Credit Jumps 11.2%

These are all signs of a "Late Stage Credit Bubble"

Ability to buy things one cannot really afford does not make or keep someone in the "middle class".

Wages are not keeping up with needs and desires.

Collectively, these reports show a late stage credit bubble the Fed desperately wants to keep inflating.

Mike "Mish" Shedlock