Car Loans Meltdown is Coming

It’s been on the horizon for some time, but a recent report from the Federal Reserve Bank of New York has confirmed suspicions that a bubble is about to pop in car sales. What’s fueling this future chaos, you ask? Banks going bonanza on lending to subprime borrowers and dealerships sticking them with cars not known for reliability.

It doesn’t take a genius to see what will happen next. There are a record number of subprime borrowers, and that means more people behind on their payments in the U.S. than ever. If you’ve seen recovery tow trucks trolling around your area more than in years past, it’s not a coincidence.

There are a record number of Americans who are 90 days-plus late on their auto loan payments. That’s not a fun position to be in, and it will have some big consequences for the car market.

First, banks seem to be tightening up lending standards for subprime borrowers, probably because they can now see the monster they’ve created. That means in the long run, auto loans will probably be quite stable. But there’s going to be a purge as cars get repossessed, then sold at auction.

The good news is record-high used car prices could drop like a rock with a deluge of repossessed cars on the market. That, in turn, would cause fewer low-income shoppers to turn to exorbitant interest rates on a so-so car at a dealership. It’s a solution that could help everyone, but some people will have to go through some pain to get there.