Cars and houses: The borrowing bubble

This article was originally on a blog post platform and may be missing photos, graphics or links. See About archive blog posts.

If you think some homebuyers have been taking weird financial risks lately, take a good look at the way Americans are financing their cars these days. Ken Bensinger’s insightful piece in today’s LATimes explains that car ‘buyers’ (are they really even buying the car?) are increasingly rolling over previous car loans into new car loans. The result: bigger and bigger vehicle loans, often for way more money than the new vehicle is worth.

Example: Cindy Gerhardt, the Oklahoma secretary pictured at right, ‘has rolled over so much debt on successive vehicle purchases -- five in three years -- that she now owes almost $43,000 on two trucks worth no more than $29,000 and, she says, perhaps as little as $22,000.’

Who needs to buy five vehicles in three years? But I digress.

The potential consequences mirror the mortgage meltdown: at some point (it’s already happening) defaults on auto loans start to rise. The underlying value of auto loans repackaged as securities drops, and the owners of those loans take losses, and at some point credit tightens, which hurts auto sales, which hurts the overall economy. Not a pretty picture.

And not a picture that lends itself to sound policy solutions. Show me a politician of any stripe who will say to Americans: you can’t really afford that new SUV. You can’t really afford that new house. You need to manage your credit more carefully.

Your thoughts? Comments? Insights? Email story tips to [email protected].
Photo Credit: LATimes