Will Car Loans Cause Next Financial Crisis?

Are “sub-prime” car loans going to cause a new financial crash, just as sub-prime mortgages triggered the crisis in 2008? That’s the possibility highlighted in an article by The Guardian last week. “Personal contract plans” are booming, and becoming the main way that people fund their new car purchases these days. But experts argue that this could be pushing already-indebted households beyond their means –

“Car financing in the UK is a “flashing light”, according to Andrew Evans, a fund manager at investment firm Schroders. “Borrowing is a very bad idea when it is done against a depreciating asset … such as a car,” he said, adding that there was a “serious level of fragility built into the system”… In the US, people are also binge-buying cars. Last year, the total stock of outstanding car loans jumped to $1.1tn (£880bn) in the US, prompting Harry Dent, a financial commentator, to ask: “Could cars be the death of us this time round?” … These deals are part a colossal buildup of debt in the UK, some of it taken out by people with poor credit scores, and which has some experts warning of an uncomfortable parallel with sub-prime mortgages before the financial crisis…. Last month, the Bank of England warned that consumer credit, including car loans, was close to levels not seen since the 2008 financial crash. Credit agency Experian, which monitors personal indebtedness, told the Guardian that “the number of PCPs overall has increased fivefold (394%) over the last five years”… Some of the car-leasing loans in the US and the UK have been packaged into asset-backed securities, to be sold on to investors such as pension funds. This was an asset class that played a ruinous role in the credit crunch, except this time the collateral for these assets is cars, not houses.”