Breathe Easy: Feds Say There's No Subprime Bubble In Auto Loans

August 11, 2014

Car sales are booming, and banks are doing brisk business in auto loans, especially subprime loans for borrowers with poor credit or no credit at all. That has many analysts worried that we're seeing a bubble in the subprime market -- that same sort of bubble that burst in 2007/2008 and helped hurl us into the Great Recession.

According to Bloomberg, however, those fears are likely misplaced. The New York Fed's Matthew Ward agrees that the subprime market is growing, but he points out that it's growing in proper proportion to non-subprime loans.

As a percentage of the whole, subprimes now make up about 28 percent of all auto loans. Ward notes that subprimes "are just recently approaching historically 'normal' levels" and remain lower than they were in the years leading up to the Great Recession.

It's true that people are taking out slightly larger loans than they did in 2005 and 2006. However, car prices have increased over the past decade: the average cost of a new car currently hovers above $30,000, rising nearly nine percent in the past four years alone. During those same four years, the average salary grew only four percent.

Simply put, buying a car takes more dough these days. That's why Americans owe a record-high $902 billion in auto loans.

While that may sound ominous, the good news is, most borrowers are paying on time. Perhaps that's because they've been chastened by the Great Recession and are trying to be more responsible with their money. Or perhaps it's a sign that people have good jobs: after all, millions of Americans drive to work each day, and without a car in the garage, that task becomes much, much more difficult. (That helps explain why many consumers who find themselves in a pinch will pay their car note before their mortgage and credit cards.)

If you're planning to purchase a new or used car and you need financing, just remember: go to the dealership fully prepared, or you may leave the dealership having paid through the nose. 


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