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Are booming auto loans risky for banks?

Mark Garrison Mar 3, 2016
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A woman signs a contract with a sales consultant at a Hyundai dealership. PAUL J. RICHARDS/AFP/Getty Images

Are booming auto loans risky for banks?

Mark Garrison Mar 3, 2016
A woman signs a contract with a sales consultant at a Hyundai dealership. PAUL J. RICHARDS/AFP/Getty Images
HTML EMBED:
COPY

Americans are borrowing more than ever to buy new cars. Some people are very worried about what this will mean.

New numbers out Thursday show the average monthly new car loan payment rising to $493, the highest Experian Automotive has ever recorded. Gas is cheap, unemployment is down and interest rates are still pretty low. All that has Americans swarming showrooms to snap up the new models with their improved technology. And banks are stepping up to loan them money.

The uptick in activity has got some catastrophe-minded observers worrying that the auto finance industry is getting too risky. Optimists make a different case. Here are arguments from both sides.

The car loan business is healthy:
1) The majority of loans are going to people with good credit, so-called prime and superprime borrowers.
2) 2015 was a smash year for new car sales and 2016 is starting off strong.

The car loan business is scary:
1) Troubled loans are on the rise, nearing $1.1 billion last year.
2) The astounding post-recession run of new car sales can’t last forever.

Which side is proven right may depend on whether banks wade further into the subprime market, as well as big picture job market factors that will determine whether today’s strong borrowers remain strong financially.

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