Car Loans May Not Cause Bubble, But Crash Still Possible

Back in February we reported on growing concerns that the number of loans being taken out to buy new cars could lead to a financial “bubble”, similar to the housing bubble that triggered the last worldwide financial crash. The danger from car loans is now being down-played, but there are still concerns that there are dark areas of the financial system being overlooked by regulators.

The Guardian reports

“In 2008 it was the mortgage sector in the US that triggered the worst global financial crash since 1929. US house buyers on low incomes were sold homes by lenders using teaser rates that offered massive discounts for two or three years on standard fixed rates. Refinancing was easy as long as the base rate remained low… Once the Federal Reserve began raising interest rates, it become financially crippling to refinance a mortgage and arrears began to creep upwards… By 2006, millions of American families were in financial trouble and by 2008 hundreds of thousands were handing the keys of their homes back, leaving the banks with huge debts on their balance sheets… Today the US central bank is again raising interest rates, and the jump in credit costs is hitting the finances of low-income families, forcing them into arrears or to default on their loans… But the situation is very different to 2008 and even the years leading up to it. Car loans are an important component of the credit market, but are still dwarfed by home loans. As such, it is unlikely that dodgy car-loan books will see the big lenders getting themselves in such deep trouble.”