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Is an automotive financing bubble on the horizon?

Posted on Sunday, June 19, 2016 at 4:10:18 PM

The automotive financing market has become largely a tug of war between dealers and lenders, with each party trying to satisfy all spectrums of credit for the consumer. With competition so fierce, lenders are buying deep into subprime lending or making questionable calls such as waiving proof of income on customers with derogatory credit. The actions and others, especially targeting customers who are underwater on existing loans, might cause an automotive lending bubble. 

It's a vicious cycle for the customers, but the lenders are seeing huge profits with the interest rate and acquisition fees that are paid by the dealers. With delinquencies low, the lenders do not see much risk involved with allowing additional money for financing, which is not looking out for the consumer's best interests.

Compared to the mortgage crisis of 2008, auto lenders are allowing the same lending principles that had customers owing more than what their houses were worth. The difference is that consumers are viewing their vehicles as more of a priority than their houses. The delinquencies are low because the consumers need their vehicles for their livelihoods. They will make ends meet to ensure the auto loan payments are made, which can be more attainable than larger mortgage payments.

Whether the bubble will grow and burst is yet to be seen, but one thing is for sure - consumers should be working with community banks that stick to safe, moral and sound lending practices.