Car Dependence and the Troubling Rise of Subprime Auto Loans

There have been warning signs about the growth in subprime auto loans for years now. But the issue got some very high-profile attention last week when JP Morgan Chase CEO Jamie Dimon raised concerns that there may be a bubble in the auto lending market.

Photo: Credit Now Auto Sales
Photo: Credit Now Auto Sales

Since the economic recovery began, lending institutions have actually loosened standards for car loans. The auto finance sector was excluded from regulation by the Consumer Financial Protection Bureau, which was created after the housing crisis to help regulate the consumer banking and credit industry.

Since then, more Americans have chosen to borrow to pay for their cars. About 86 percent of new cars were financed in 2015, up from 80 percent in 2008, according to Tony Dutzik of the Frontier Group, who has been researching the issue. For used cars, the financing rate rose to 55 percent in the second quarter of 2015 — about 7 percentage points higher than in 2010.

Lower-income borrowers account for a large share of the growth in car loans. According to a 2014 New York Times story, subprime auto lending increased 130 percent in the five years following the recession.

Evidence suggests consumers are being stretched thin. Default rates have been climbing. CNN Money reported in March that unpaid subprime car loans are at a 20-year high. As Dimon indicated, this may pose a risk to the broader economy.

But the core issue, says Carjacked author and Brown University professor Catherine Lutz, is the high cost of car dependent development patterns for low-income people. The subprime auto market is booming because in so much of the country, owning a car is a necessity to access employment and other basics.

“If you look at what people have to pay to stay in a car it’s a phenomenal amount of money,” she said. “The bottom two [income] quintiles often have zero equity in anything. So to get a car they have to take a loan.”

“The car lenders have really been quite predatory to people from working-class backgrounds,”  she added. “They’re coming in with a low credit score and not a lot of negotiating power. Maybe they need a car the same day because their car has broken down. They get crummier loan conditions and higher prices. The poor pay more for the same car than the rich do.”

The typical length of an auto loan used to be about four years — 48 months. But that is getting stretched. Now people can, and often do, secure 72 month loans for auto purchases.

“Those are really dangerous because a car breaks down. It’s not like a house,” said Lutz. Borrowers take out loans “in the hopes of having the car be operable at the end of it. If not they still owe money on a car they don’t own.”

The problematic trend isn’t that more Americans can’t access transit since the recession, Lutz says. It’s that poor people are getting poorer because of wage stagnation, while cars are getting more expensive. The average new car cost about $31,000 in 2015, according to USA Today, and a used car about $16,000 — a 3.5 percent increase in two years.

But in most places, going without a car is worse than going into debt to acquire one. According to a 2011 Brookings study, the typical resident of a U.S. metro area can only access about 30 percent of the region’s jobs within a 90-minute transit commute.

“If you are in a situation where you do need to drive to get to work and to get your needs and you don’t have good credit, you can find yourself in this cycle of ever deepening debt,” said Dutzik.

19 thoughts on Car Dependence and the Troubling Rise of Subprime Auto Loans

  1. Terrible situation we are in.

    The population of the USA is so dependent on automobiles.

    So much for “freedom.”

  2. I get really frustrated with op-eds that argue, without any basis in reality, that people don’t want public transit. This article highlights the problem with such arguments- debt. Transportation, like a job, is simply a means to an end. People are being forced to shift transportation as the means to an end (happiness, security, essentials and a little disposable income). Instead the means has shifted and a job is to get money to pay for a car, and the other things are no longer available (happiness, food, security, safety).

    What gets me is that those same op-eds gloss over the fact that it would be cheaper for us if we just provided reliable public transportation, so people can get back to what transportation is for (a means to an end, not the end). Such people would have disposable income to spend on their neighborhood, and on themselves.

    Thanks Angie and everyone at Streetsblog for writing on these important problems and keep it up please!

  3. I wonder if the increased borrowing is a rational response to market signals. Many automakers will “finance” your purchase at 0%. It would be irrational to not take that deal.

  4. People would not be in such debt if the government did not increase the cost of both used and new cars with the cash for clunkers program a few years back. Also the federal reserve policy of near zero interest rates encourage more borrowing and raised the price of almost everything. These governments that run most of our public transportation systems do a terrible job running them. Don’t get me started on the whole home mortgage deduction, the sad shape of most major city school systems, and crime rates in places like Detroit, St. Louis, and Chicago.. In short the same politicians that want to tell us how to live have forced most people to choose a car dependent lifestyle. If you want people to adopt a car less lifestyle then quit legislating behavior. Fix inner city crime, liberalize zoning laws, fix our schools or allow for competing schools, and you will see more people choose to live close together.

  5. It wasn’t hard to figure out that between car payments, insurance, gas, etc, I was easily coming out ahead financially as well as in terms of quality of life by biting the bullet and paying the rent to live in Santa Monica without a car (my job is in Santa Monica), rather than live somewhere else with a car. I likely would have moved to some place like Culver City if I’d moved here when the Expo extension was open, and I may have found myself with enough extra cash that I’d have bought a car at some point.

    I am conscious of it being hard to get out of Santa Monica during the week and my constrained set of options on the weekend, but that’s the fault of both Big Blue Bus and Metro to get serious about their bus systems, as well as the built environment. (Where I live in Santa Monica I’m serviced by two very low-frequency and unreliable BBB lines.) Plus, rent control building, not giving that up lightly, yada yada. It doesn’t affect me to the point where I’m willing to move or scrimp to have a car, although I’d probably get one if I made double my salary.

    Oh, and to the point other articles on here have made recently about the cost of parking? My apartment came with a parking spot. Unlike the last place I lived in DC it was an option to not take one, and my lease forbids me from subletting the spot (secure garage, and once you’re into the the garage you have free run of the building, so I don’t blame the landlord on the subletting ban). It’s proved nice to be able to offer friends who come over a place to park but it’s probably not worth the extra money it’s costing me in rent.

    And to tie in yet another topic, it’s not like I could really shop around on the parking spot point, because ultimately I wound up in the building I did because between the housing shortage and rent control (I know I just said I’m benefiting from it now, that doesn’t mean I think it’s the right way to do things) a ton of the apartments in Santa Monica are utter shitholes and this one is actually reasonably well kept.

  6. Are you allowed to rent to other tenants in your complex? My condo doesn’t permit rental to outsiders – due to security issues – but does permit renting to other residents.

  7. I’m pretty sure the exact language is a blanket “thou shalt not” but in I do suspect that in practice it would be fine as long as it were another tenant. However, I don’t need the money enough to care about putting in the effort, and they’d probably want my garage clicker for the second car. (Plus, I do get just enough use out of it between friends, occasional car rentals, etc that I’m not sure I want to give up the spot, even though I absolutely wouldn’t have taken one if they’d been offered separately.)

  8. “Transportation, like a job, is simply a means to an end.”

    That’s pretty reductionist. I would actually argue that the American psyche is invested in cars that go FAR beyond just a “means to an end”. Think of all of the concepts tied up in automobility: freedom to come and go as you please, the aesthetics (cars as sexy), power (literally hundreds of horsepower under your right foot), fun (a winding back road in a sports car is just plain fun), etc.

    What’s happened now is that with the average price of a new car above $30k, coupled with income stagnation, the exorbitant total cost of vehicle ownership, and a built environment in most of the country that forces you to have one just to be a full citizen, and we have a disaster on our hands.

  9. Having spent a lot of time in the suburbs up and down the coast this past year, I’ve noticed something I never noticed much before: lots of places advertising title loans.

  10. This issue could be exacerbated by the renewed interest in the urbanization of US Cities. For the past several decades, city centers and downtowns harbored low income households, but in more recent years these urban environs have become desirable neighborhoods for middle / higher income households and earners. In the gentrification of urban America, the low income earners are pushed further and further away from dependable, transit accessible jobs.

  11. The counter is that cars are much more reliable than they were a decade or two ago, as evidenced at how little some cars depreciate. If someone wanted to get a 6 year loan on a Toyota Camry or Honda Civic, that would not be as bad an idea as, say, a 4 year loan on a VW New Beetle (as my friend recently did). The problem is that people don’t want reliable and boring, they want comfortable and sexy. I continue to drive my 2004 Acura TSX and probably will be driving it for a few more years, with its low cost of ownership and reliability.

  12. Sometimes reduction brings truth into focus, James. Those who can afford sexy and power, great. Sexy costs ~$10,000 a year. If your car payment is a huge chunk of a paycheck, it’s not sexy, it’s bondage. If you are car poor a person cannot contribute to local economies, further exasperating neighborhoods. An average bicyclist spends more in the local economy than an average driver (in the form of shopping and restaurants). Plus, drivers are subsidized to the point of unfairness to other modes of transportation. If drivers paid the true cost, people would flock to dump their car. It is not a sustainable transportation model.

  13. That is why we need to address the problem now with proper planning. Too many nimbies crying no to housing. We need to identify dense areas around active transportation, and give preference to developers who build affordable housing, before they are granted plans to build expensive units. And end parking requirements within active transpo districts (at a minimum).

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Photo: Credit Now Auto Sales

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