Car Dealers Make More Profit On Loans Than Selling Cars

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A third of auto loans in 2019 had a term period over six years. People cannot afford the cars they are buying.

Seven-Year Loan Surge

America’s middle class can’t afford its cars.

A surge in the Seven-Year Auto Loan rate provides all the evidence you need.

Walk into an auto dealership these days and you might walk out with a seven-year car loan.

That means monthly payments that last well past when the brake pads give out and potentially beyond when the car gets traded in for a new one. About a third of auto loans for new vehicles taken in the first half of 2019 had terms of longer than six years, according to credit-reporting firm Experian PLC. A decade ago, that number was less than 10%.

Incomes have risen at a sluggish pace in the past decade, but car prices have grown rapidly. A lending machine has revved up in response, making it possible for more Americans to procure a vehicle by spreading the debt over longer periods. Wall Street investors snap up these loans, which are bundled into bonds. Dealers now make more money on the loans their customers take than on the cars they sell.

Families Go Deep in Debt to Stay Middle Class

On September 9, I noted Families Go Deep in Debt to Stay Middle Class: Revolving Credit Jumps 11.2%

These are signs of a "Late Stage Credit Bubble"

Ability to buy things one cannot really afford does not make or keep someone in the "middle class".

Wages are not keeping up with needs and desires.

Collectively, these reports show a late stage credit bubble the Fed desperately wants to keep inflating.

Mike "Mish" Shedlock

Comments (73)
No. 1-30
Casual_Observer
Casual_Observer

The reason people cannot afford the cars they are buying is because the banking system is similar to the insurance system. If cars and homes could only be paid for through credit cards or cash, the prices of them would fall like a rock. We will get < 2% on mortgages soon. A final reflation and then a collapse to <1% on all loans. What this "late-cycle" has showed, is that as time goes to infinity, rates must go to zero.

Stuki
Stuki

The ultimate goal of all fully financialized dystopias, is that all money is made from loans. Fully systemic rent seeking, IOW. That way, the rank idiots who champion the illiteracy, don't have to worry, that their lack of absolutely anything else of value whatsoever aside from Fed provided "asset vaijues" to lend out, will cause them to simply be routed around and left for dead by their betters.

As for the Fed itself: When every single penny owned and/or acquired by anyone, is due solely to their closeness to The Fed, rather than to any productive ability, talent, aptitude nor effort on their own part;...... well, The Fed is sitting pretty sweet....

shamrock
shamrock

I was initially confused that dealerships make money on insurance. I totally forgot they push gap insurance, unemployment insurance, and life insurance for those car loans.

Harry-Ireland
Harry-Ireland

"These are signs of a "Late Stage Credit Bubble" Mish, this is something I'd like to read more about. I'd love to read your insights/predictions regarding this matter. Or your thoughts on 'the endgame'. Thank you.

2banana
2banana

I guess you missed the GMAC bailout under obama about nine years ago. They couldn't "afford" cars at that time.

Only $17 billion of taxpayer money flushed down the toilet.

"A third of auto loans in 2019 had a term period over six years. People cannot afford the cars they are buying."

Six000mileyear
Six000mileyear

Dealers also make money on vehicle repairs.

Carl_R
Carl_R

Not so long ago, the average car lasted 5-7 years, so financing it beyond 36 months was a stretch. Today the average car lasts about 12 years. Financing a car with a life of 60 months for 36 months is 60% of the useful life. Financing a car with a 12 years life for 86 months is 60% of the useful life.

Maximus_Minimus
Maximus_Minimus

"Thanks to stretched out payments, dealers make more on loans than cars."

Thanks to financially illiterate poor suckers, dealers make more on loans than cars. I guess, they can still manage a standard sub-compact instead of a usual fully loaded gas guzzling SUV.

numike
numike

Did someone on here at various times say socialism?
How taxpayers may wind up subsidizing Uber and WeWork’s losses https://qz.com/1719019/wework-and-ubers-losses-may-be-subsidized-by-taxpayers/

abend237-04
abend237-04

In the 11th year of our Fed-purchased expansion, 40% of people report they can't handle a $400 emergency expense. Does this mean I can get a really good deal on a used Glitzmobile soon?

L.Ron.Hoover
L.Ron.Hoover

All the McMommies in North County need at least a Lexus to be seen in, and it's all good, because the McMansion is appreciating and there's HELOCs as far as the eye can see. 6 year car loan? 7? 10? Why not 30? The house will pay for it all! What could possibly go wrong?

thimk
thimk

These new cars aren't engineered to be easily repairable. after 100k you will find it costly to change just the spark plugs . I think many will be abandoned due to inaffordable repair costs.

Country Bob
Country Bob

If only our society had an institution that would educate the population on basic math... one of those school thing-ys that we sometimes hear about in history documentaries. Then Joe and Jane Q Public could understand mortgage and car loans enough to make intelligent choices...

Lots of people like to talk about how US healthcare costs are out of control, but our health outcomes aren't as good as countries that spend half as much.

Check out health inflation in the chart... then check out education and textbooks

Greggg
Greggg

Lurking underneath the whole pricing scheme of US auto industry is the 25% tariffs on foreign trucks that was imposed in the 1980s. It served to jack the prices across all cars and trucks.

lol
lol

The big 3 will all need fresh bailouts,banks will also need massive fresh bailouts,Fannie /Freddie will need fresh bailouts,state pensions will need a massive bailouts,2020 will be the year of the (collapse) bailout!

Sunriver
Sunriver

Seven year auto loans. Thirty year mortgages. Unpayable student loans. Paycheck to paycheck credit card debt. And now the young are buying into "The Everything Bubble". The FED has helped create Debt Slaves. Call it what it is.

Runner Dan
Runner Dan

“Wall Street investors snap up these loans, which are bundled into bonds...”

“...and subsequently sold to banks who collude with each other to bid up prices and inflate their respective balance sheets until they start calling BULL on each other in the repo market…”

Don’t worry though, because in the end, the Fed will bail all the players out by buying their garbage at face value in the name of “helping the economy.”

Sechel
Sechel

This isn't news. It's been going on for some time. No accident that GM refued to give up lending after its bankruptcy and that Republicans fought to exempt auto loans from oversight from the consumer financial bureau. its a murky world subprime auto loans, not only are terms long and ltv's high but the loans are padded with fees. its even worse with used vehicles where the car probably won't survive the duration of the loan.

Sechel
Sechel

Not only are the ltv's , ltv's and fico score's troubling when these subprime auto loans are packaged the originator doesn't even verify the underwriting, in some cases we're talking about sampling only 5%

JonSellers
JonSellers

Here's how you buy a new car. Find the one you want and offer $5000 less than asking, up to $10,000 on a higher end car. That's too much, but it provides some room for negotiation. Let them know you want the longest terms possible on a loan. That way they'll be happy to negotiate a lower sticker hoping to get their money on fees. Once they draw everything up, tell them you've decided to pay cash instead and write a check.

If you can't write a check, don't ever buy the car.

KidHorn
KidHorn

This explains a lot. A few months ago I bought my son a new Kia Optima. We went to a few dealerships and eventually was given the best price. They then went into how I could finance it. I told them I was just going to write a check for the whole thing. They were shocked and desperately wanted me to finance. They told me it would be less expensive. Which of course I knew was BS. I assume they gave me the lower financing cost instead of the cash price. The car had a msrp of $28k and I paid $23k. After taxes, destination charges, processing fees, etc... I think they took off close to $8k.

Bronco
Bronco

Not mentioned is leasing. Another tool to get people into new vehicles they can't afford. Edmunds recently reported that a RECORD number of new vehicle sales are leased ... 32% of sales.

Sechel
Sechel

It all comes down that people aren't buying cars, they're renting money

Irondoor
Irondoor

I recently traded my 10 year-old pickup for a new one. They are ridiculously expensive, but it will be my last truck purchase (age). After the negotiation on price (a $12,000 discount), the dealer offered another $5,500 off if I would finance it over 6 years with GM at $600 per month. I had intended to pay cash, but $5,500 is good money. The dealer told me that I only had to make 4 payments and then I could pay it off if I wanted to. Looks like the dealer screwed GM on this one.

ksdude69
ksdude69

I'd like to propose that "families se for go deep in debt" to stay at the middle to upper of the lower class vs middle class. They just want the "illusion" of middle class. 500k home, new cars, stainless fridge, 50 credit cards and no money in the bank. My neighbor just sold his house for $600k to a couple with 3kids that put 200k down. In the 3 months they've been here ive seen them in the yard twice. They are at work all the time.

vadertime
vadertime

Most Americans don't know how to budget or plan for the future. Why would anyone with minimal financial acumen want to get into a 6 or 7 year loan. It doesn't make financial sense to own a rapidly depreciating asset for that long of a period. It won't be worth very much when trading it in 7 years later, not to mention the cost of repairs on an aging vehicle.

astroboy
astroboy

I took out a six year loan on my car since the rate was about 1% and I (correctly) figured I could do alot better that 1% in the stock market. Low interest rates might be a factor although I wouldn't doubt it's mainly because of flat wages.

Carl_R
Carl_R

People here are overthinking things. What insurance are these dealers selling that rakes in the profit? Back up and think about the last time you bought a car. Did they try to sell you insurance against maintenance (i.e. extended warranty)? How about insurance against glass breakage (i.e. glass protection package)? Perhaps insurance against paint failure? These are all very high profit for the dealer.