December 3, 2019 1:17 pm

USA: Bad car loans increase significantly

The car is still considered a prestige object – especially in the USA. Because fewer and fewer Americans can often afford new cars equipped with many extras at the first go, they finance them. The term of the loans is often up to seven years, making the monthly amounts affordable.

Before the loan is paid off, the next vehicle purchase is often already pending. The existing loan is then transferred to the new one, which increases the interest – and thus the charges. In recent years, a kind of snowball system has developed that threatens to collapse very soon.

According to the Federal Reserve Bank of New York, car loans worth USD 1.3 trillion were outstanding at the end of the third quarter. Nearly five percent of these (62 billion US dollars) are considered extremely vulnerable to default, as they have not been serviced for more than 90 days. By way of comparison, five years ago the share was still around three percent (29 billion US dollars).

Many experts see parallels in the area of auto asset-backed securities (ABS) to the subprime crisis – which then triggered the global financial crisis from 2007 onwards. Car loans are also increasingly being securitised and traded. This year, the issue volume has already risen to around 29 billion dollars. Financial Times

This post was written by Jens Secker

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