Consumers in the US borrowed around $119 billion in the second quarter of 2015 to buy cars, which is a 10-year record number. Based on the sales as of May, 2015, annual auto loan is expected to exceed $1 trillion for the current year which is staggering considering that the amount of auto loan is projected to be around the same amount borrowed by students in the US to finance their education.
Prior to the financial crisis, auto lending and credit-card lending were competing for the second- and third-largest categories of U.S. household debt (mortgages was the first category). Today, both auto loans and student loans exceed credit card loans and home mortgages. One explanation for the rise in the auto is that borrowers with low credit scores are typically able to get cheap financing because the delinquency rates are near an all-time low. Because student loans tend to be subsidized by the federal government, rise in student loan is not unexpected. However, despite the money being injected by the FED following the financial crisis, borrowers with low credit scores, also known as subprime borrowers, have found it relatively difficult to find mortgage financing. For instance, the aggregate amount of new loans to individuals with low credit scores (< 660) was $650 billion in 2006. Mortgage financing offered to individuals with low credit scores has fallen below $150 billion since 2010 (data based on New York Fed).
Banks today are reluctant to lend to subprime borrowers so buying a home for some maybe a distant dream yet such borrowers face relatively fewer hurdles to find cheap financing for their dream car. The unexpected rise in the demand for cars is also fueling the growth of the Detroit auto-makers. Are you ready to buy your dream car? Banks are eager to earn your business!