Jaspreet Singh: The Auto Loan Bubble Just Got Worse

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Jaspreet Singh, founder of the “Minority Mindset” YouTube channel and website, posted a timely message on Oct. 30 regarding how auto loans and overall credit conditions are affecting American consumers and the economy.

Citing a variety of statistics, Singh suggested that the financial position of American consumers is weakening. Here’s a look at the data points that are worrying Singh and how he suggests the economy will react going forward.

Car Loan Rates and Delinquencies

In his video, Singh quotes statistics from Fitch Ratings showing that 6.1% of car loans are now 60 days delinquent, which is the highest rate since 1994. Meanwhile, subprime auto loans now charge rates of about 21%, which are extraordinarily high. Even some credit cards don’t charge rates that high. This means that lower-credit borrowers are really being stretched.

But that’s not even the whole story. According to Singh, 20% of borrowers now have car payments over $1,000 per month. That doesn’t even factor in added expenses like insurance, gas, maintenance, oil changes and so on.

When you add it all together, the current situation for car owners in America is bleak. 

The Credit Situation in America

Things aren’t much better when it comes to credit card debt. Wells Fargo recently reported a rise in consumer credit card delinquencies as well.

At the same time, the total amount of outstanding credit card debt is also at its highest level ever, at over $1 trillion. All of these factors show that Americans are having trouble managing high interest rates and high inflation and instead are putting purchases on their credit cards.

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How Does This Affect Used Car Pricing?

Used car pricing, according to Singh, is actually falling. This is the result of a long chain of complex dynamics that started during the huge car-buying boom of 2020-21. At that time, Americans had more money in their pockets and lower expenses, thanks to the wave of pandemic cash pumped into the system by the Federal Reserve and record-low interest rates. 

But things have changed. In the current environment, interest rates are extremely high, there’s a shortage of cars and new-car prices are near their all-time highs. Demand is slowing, due to this combination of factors, and that is driving used-car prices down.

What this means is that Americans who bought used cars in 2022 and 2023 might be underwater on their loans, meaning they owe more than their cars are worth. This could accelerate the number of auto-loan delinquencies going forward.

How Do Customer Spending Patterns Affect the Economy?

When you review the complex economic picture that Singh paints, it all points to a weakening American consumer. As the U.S. economy is driven in large part by consumer spending, this bodes poorly for the future.

The combination of high inflation and rising interest rates has squeezed the budgets of the average American, and that is being reflected in increasing credit card delinquencies, record-high amounts of debt and the highest auto loan delinquency rate since 1994. According to Singh, the first things most people stop paying during times of financial stress are their car loans.

As Singh explains it, if people can’t keep spending, the economy slows, which normally leads to Fed rate cuts. However, low rates tend to kick-start inflation. As the inflation rate is already well above normal in the U.S., that might not be an option for the Fed this time around. This could make things even harder on average Americans, as they’ll be facing a slowing economy in the midst of stubbornly high inflation.  

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Takeaway Lessons Offered by Singh

Singh tells his viewers that the current economic condition offers lessons you can use to boost your financial education. Primarily, you should learn to use low rates to finance assets instead of liabilities.

When rates fall, instead of borrowing as much as you can to buy a liability like a car, take advantage of those rates to buy assets, especially those that can generate cash flow. Then, if rates rise later, rather than being underwater on a liability, you’re financing a high-paying asset at a low rate.

Singh also suggests that you prepare yourself financially for what’s likely to be an increasingly difficult economic situation. Avoid borrowing at high interest rates, especially to finance liabilities, and wait until opportunities arise in the future. But take advantage of high interest rates for things like your emergency fund, where you can pick up yields of 4% to 5% on high-yield savings accounts and U.S. Treasury bills.

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