Is the subprime car loan the next real estate bubble? – Streetsblog United States


U.S. pro-car transportation policies impose crushing costs on low-income people – and could slow the overall economy, according to a new report.

Auto loan rates are soaring, especially among the most vulnerable borrowers. And low-income people are subject to a series of shady auto lending practices, like subprime lending and racial discrimination, say the US Public Interest Research Group and the Frontier Group in their report. report.

It’s starting to look almost like a bubble. Auto debt has increased 75% since 2009 to about $ 1.26 trillion, or about 5.5% of GDP, reports the PIRG. Perhaps more worrying: A record 7 million Americans are now three months behind on their car payments, a sign that the U.S. economy could run out of steam, the Washington post reported Tuesday.

auto debt chart
Chart: US PIRG / Frontier Group

“In much of the United States, access to a car is virtually essential for getting a job or leading a busy, dynamic life,” the authors write. “Generations of car-centric transport policies – including lavish spending on roads, sprawl-inducing land use policies, and meager support for other modes of transport – have left millions in Americans entirely dependent on the car for their daily lives. “

Transportation is the second largest expense of American households, behind housing. And for working people, owning a car is practically a necessity in most of the United States. About 86% of American workers drive alone to get to work. Even in some of the most accessible places by public transit, a surprising proportion of workers depend on driving. In the New York metropolitan area, with its expansive city-wide regional subway and rail lines, only 15 percent of the area’s jobs can be reached within an hour by public transit, but 75 percent of jobs in the area can be reached within an hour by transit. One hundred of the area’s jobs could be accessed in the same amount of time by a motorist, says PIRG.

Americans get by by borrowing – this is in part because of more flexible lending standards. In 2018, there were 113 million car loans open, up 39% since 2010. And Americans are extending the terms of their loans. About 42% of auto loans now last 6 years or more, which costs more in the long run.

Today, new cars are almost always financed – around 85%, down from 75% a decade ago. And even with used cars, a majority – 53% – were financed in 2018.

Discrimination is common. Lenders as diverse as Toyota, Fifth Third Bank and the Ally loan company have all been fined by the Consumer Finance Protection Bureau for overcharging black and Hispanic borrowers. Previous research has established that black borrowers pay an average of $ 300 to $ 500 more for a car loan.

Other loan abuses are stupendous. Some borrowers will continue to repay their loans even after repossessing the car, reports PIRG. Lenders like Santander have repossessed a single vehicle from customers up to three or four times.

Photo: Frontier Group / US PIRG
Photo: Frontier Group / US PIRG

Reforms

PIRG and the Frontier Group say credit reforms are needed to protect low-income borrowers. They recommend stronger consumer protections and greater separation between car dealers and lenders. State government should impose rules that cap interest rates charged by car sellers

(Unfortunately, the main group responsible for consumer loan protection – CFPB – was stoned by President Trump.)

Reforms are also needed in transport policy so that more people can work and live fully without owning a car. Over the past two generations, investment in transport has been heavily devoted to highways (see graph, right).

In addition, the United States needs land use policies that encourage the development of housing that is more walkable and accessible to public transportation. In addition, a greater investment in public transit and more street space dedicated to public transit, walking and cycling could help create a dynamic where people do not have to mortgage their future to find themselves. get to work.

Cities with more compact land use tend to have lower household transportation expenses. For example, Texas was the top state for auto loans, according to the PIRG report. The average borrower owes $ 7,000.

Chart: US PIRG / Frontier Group
Chart: US PIRG / Frontier Group

But rather than freeing us from auto addiction, cheap auto loans make the problem worse. The PIRG estimates that the increase in auto loans may have increased greenhouse gas emissions from transportation by up to 6% between 2010 and 2016. A to study released today by TransitCenter also named them as one of the main causes of the national decline in transit ridership.

Also alarming: The number of delinquent auto loans is on the rise – and the proportion of auto loans held by people with poor credit is also on the rise, as the Federal Reserve reported earlier this week (see charts below below).

Fed chart 1 powered card 2


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