Auto Lending Madness - Did Someone Say "Bubble?"
I had suspected there was a bubble forming in the automobile market after hearing countless advertisements saying things like “Bad Credit? No Credit? You’re Approved!” This was akin to the ads I saw amid the growth of the housing bubble. My fears would soon be confirmed.
My girlfriend @sharingeverybite and I were at the car dealership purchasing a new car. We found the perfect car for her - a tangerine-colored Toyota Prius. After negotiating a killer deal, we were finalizing the paperwork with Jim, the finance guy. A section of the paperwork mentioned GAP insurance and we got to talking about it. I made a comment saying it's unnecessary if you’re paying a few thousand dollars down.
Here’s where things got interesting:
Jim - “Yes, except most people who come in here are paying no down payment whatsoever.”
Me - “Really?! Nothing down?”
Jim - “Yes, in fact, most people have negative equity in their trade-in and are rolling over that negative equity into their new car.”
What Jim just said is paramount, so let me say reiterate this:
- Most people buying a new car at this dealership are underwater on their vehicle.
- They can’t afford, or at least aren’t paying any down payment.
- Customers are rolling over that negative equity into their new car, which also has negative equity the moment it’s driven off the lot.
This kind of lending behavior isn’t typical. And this is the majority of the dealership’s clientele? Yikes!
I don’t live in Detroit, why should I care?
- This problem isn’t contained to Detroit.
- Be prepared mentally.
- Be prepared financially.
This isn’t contained to Detroit - When this bubble pops and if General Motors sells 50% fewer cars next year than they sold this year, they’ll be forced to scale back and lay off many people. Additionally, GM has 2,700 direct material suppliers. If GM’s business decreases by 50%, their 2,700 suppliers will also suffer. Let’s assume each of GM’s suppliers has ten suppliers and the supply chain ends there (it doesn’t) - that is 27,000 businesses who are negatively affected.
Be prepared mentally. - I think it will be much easier to persevere through difficult times if you’re mentally prepared for it. Putting on rose-colored glasses, ignoring the facts, and pretending everything will be all right won’t make things easier on you in the future.
Be prepared financially. - Note: The following should not be considered investment advice. If I owned stock in any automakers, I’d sell it. If I owned stock in any other business that largely depends on the success of automakers, I’d sell it. If I worked for one of these companies, I would assess the situation and likely look for a new job.
Furthermore, when you see giant bubbles before they pop, there’s enormous profit potential. For instance, you could purchase put options on GM. A single put option gives you the right to sell 100 shares of GM at a predetermined price before a specified date, giving you tremendous leverage with limited downside risk.
I am prepared for the worst, but hope for the best.
~Benjamin Disraeli
Do you agree with my assessment? I'd love to hear your thoughts and critiques.
My name is Jordan Rusche, and I live in the gorgeous state of Arizona. If you enjoy my writing, you can follow me here. My interests include golfing, hiking, mountain biking, tennis, weightlifting, skiing, paddleboarding, and just about anything else that keeps me active. My blog will center around economics, psychology, philosophy, and Steemit.
Oh, and my dog is way cooler than me.
"Pay me 100% in Steem Power" - Yes, please!
This is really nothing new, and it has far less to do with the auto industry than it does with the banking industry. Interest rates are very low for everything right now.
The thing you have to understand about auto loans, is that theyre basically printing money for the lender. If you don't pay they get the car back (and yeah, they almost always get it back, people are bad at hiding cars.) But it doesnt even matter if they get it back because they can sell the title to a repo company.
I agree it has far more to do with the banking industry than the auto industry.
50%?????!!!!!!! In one year? thats beyond ridiculous, its econ science fiction. Like a 10% fall in revenue, and they'll be shitting themselves. Theyll pay for it with forced, unpaid vacation for ppl in the plants if it comes to that, not by dicking over their suppliers..
The 50% was an arbitrary number. My intention wasn't to estimate how much sales could fall; it was to show how many other businesses falling sales would hurt. I don't think they would screw over their suppliers, but they'd be forced to order less product.
There are so many asset bubbles everywhere and they are so obvious it's truly disturbing. Unfortunately very few people understand this is happening. I think a salient point you make in this article is to be mentally prepared so you are not frozen when these bubbles start to implode.
The number and size of bubbles are frightening. I think it's arguably just as important to mentally prepare as it is to get ready financially. People tend to have something called a "normalcy bias." It's the thinking This thing has never happened, so it never will.
100% same page. I actually thought I was reading my own comment while reading yours lol ! It dovetails with exactly what I was thinking. It's up to those who understand what is happening to try and help interested and passionate parties of the same thinking :)
Liked your article. Arizona FTW! :)
Yes, you can identify bubble formations from the people trying to finance you; we had a similar conversation with a home lender back in 2002, who wanted to loan us four times as much money as we could afford to pay back.
That's Tangerine Splash Pearl to you Mister. 😋
Haha I knew you'd correct me on that.
I agree and what comes to my mind is why is there not a rising cry from honest, good, decent folks standing up and telling the thousands of gullible friends that are falling prey to these thieves that are yet again going to pull the economy closer to a 2008 crisis that we never return from.
Thanks for the article.
dubloon135
I have found that due to the "normalcy bias", people do not want to hear that things are not going to continue down an happy path with flowers and no thorns. Try and tell your closest friends and family who are falling prey and they laugh and think you are the crazy one.
I have heard of this before, however I was not aware that car dealers allow such behiour.
Thanks for pointing this out.
I found this out in 2000 after bill clinton signed the free trade agreement with china. The town I lived in 80% of the jobs went to china, I had to move and I kept away from any manufacturing because it's always cheaper to make in china. I would never support the clintons after such a bad deal. Canada and USA got hit hard with that, but people still buy foreign which i don't understand, but I still buy american made.
You have the right advice, great post.
Good post - the student loan bubble may be just as bad as the auto bubble. But yes, the creative financing and rolling debt into the next house...er, I mean car is a game that will not end well as we've seen elsewhere.
At some point the piper must be paid or take a huge loss....so how long will the can get kicked down the road is the 10,000 question.