The Spark

“The emancipation of the working class will only be achieved by the working class itself.” — Karl Marx

Subprime Auto Loan Bubble

Aug 31, 2015

The car companies and banks are burying car buyers under a mountain of debt. The average length of time people are borrowing to pay for a new car is now up to 66 months, or almost six years, according to Experian, a credit reporting company. And many new car loans are for eight, nine and even ten years! This, of course, reflects how much our standard of living has fallen – that we have to go in so much debt just to get transportation.

About 30 per cent of these new car loans are considered “subprime,” and have much higher interest rates. Estimates are that GM and Chrysler are using subprime loans to sell close to half their cars.

This growing debt, especially subprime debt, has helped fuel the car companies’ renaissance. This year they are expected to sell close to 17 million cars, compared to 10.4 million cars in 2009. Meanwhile, the car companies have boosted the average price of a vehicle by more than $5,000 in that same period.

As a result, automakers’ profits in the U.S. have been so large, they have largely offset weakening markets in China and Asia. Last month, Ford reported almost two billion dollar profits over three months, a 44 per cent increase over a year ago. GM reported 1.2 billion dollars in profits, up from just 278 million a year before. And the same goes for all the companies in the auto supply chain.

The banks and finance companies have also fattened their profits on car loans, especially subprime car loans for both new and used cars. Subprime finance companies like GM Financial, Ally Financial (formerly GM’s financial arm, GMAC) and the Blackstone Group’s Exeter Finance have been taking these loans and using them to create financial instruments that they have been reselling – just like Wall Street did in the run-up to the subprime mortgage crisis only a few years ago.

Of course, subprime car loans push millions into debt slavery. Subprime loan buyers are stuck paying interest rates of up to 18 per cent on new cars and 30 per cent on used cars. And the longer the loan, the higher the finance charges. Add up all those charges and the cost of the car doubles or triples. Many workers will keep on making payments for a car long after it has been junked.

Not surprisingly, car buyers have been defaulting on those loans in increasing numbers, with the rate of default almost doubling in just the last three years. But so far the auto lenders have been able to protect themselves by quickly repossessing and reselling the car. Loan companies track the cars through GPS and use automatic cutoff switches to disable them remotely – thus, not only robbing people of the only way they have to get to work, but sometimes disabling the cars in the middle of traffic.

By burying consumers in increasing debt – not only are the capitalists sowing increasing misery, they are also laying the groundwork for a new debt crisis. At the point that defaults increase rapidly, they will flood the car market with unsold cars, which can open up a brutal new economic collapse.

What a wonderful system these companies represent: debt-laden, blood-sucking capitalism.