Subprime Auto Loans Crushed Worse than in 2009, Auto Industry Bleeds, Knock-on Effects Commence

After the credit bubble comes the credit bust.

Subprime auto loans, a big force behind booming car sales in recent years, are getting crushed by defaults, particularly those originated between 2013 and 2015 when the proportion of subprime loans began to surge while underwriting standards became loosey-goosey, as private-equity-backed auto finance companies with a ravenous appetite for risk, subprime, and securitization elbowed into the market, amid the exuberance of the greatest credit bubble in history.

“Bad deals are made in good times,” says the old banking saw.

Auto lenders package their loans into asset-backed securities (ABS) and sell them as bonds to yield-hungry institutional investors. Fitch Ratings, which rates auto lenders and auto-loan ABS, just reported on the state of the industry.

The Fitch Auto ABS Indices show that 60+ day delinquencies were relatively low for prime auto loans at the end of Q4, but for subprime loans they’ve surged to 5% of outstanding balances, the highest since at least 2008, during the depth of the Financial Crisis!

Net charge-offs show a similar scenario, only worse. Net Charge-offs from prime loans ticked up to a still low 0.75% of outstanding balances. But net charge-offs from subprime loans surged to 10.5%, the highest since at least 2008!

Subprime is “particularly vulnerable,” Fitch says. It expects credit performance to deteriorate further.

Simultaneously, another trend is biting lenders and investors in subprime auto loan ABS: While for the overall market, average loan terms have reached a record 67 months, for subprime borrowers they’ve jumped to over 72 months.

Fitch adds icily:

[T]he data conflict with commentary from several large auto lenders that have suggested the loan term extensions in recent years have been primarily targeted at prime borrowers.

No one wants to accuse the industry of lying to investors about risks. But this is pretty close.

And it’s important. Longer loan terms make payments more affordable for cash-strapped consumers. Thus they pump up sales volume. And they allow finance companies and dealers to make higher profits. As underwriting standards got very loosey-goosey starting in 2013, loan terms (along with loan-to-value ratios) wandered off into new territory.

But as loan terms lengthen, depreciation of the vehicle outruns the amortization of the loan principal for longer, and borrowers have negative equity for longer, which raises the risk of loss, particularly for subprime loans. Fitch:

This will pressure recovery values on defaulted loans and also hurt customer trade-in values, which could negatively affect future new car sales/financings.

Why is this important for the industry as a whole, not just lenders and their investors?

Lenders are starting to feel the bite of those losses that are made worse by extended loan terms, higher loan-to-value ratios, a higher proportion of subprime loans, more negative equity for longer, and hence subprime defaults and net charge-offs that are soaring to crisis levels.

This spiral is made worse by dropping wholesale prices of used vehicles when they’re sold at auction, which is where lenders unload repossessed vehicles.

To tamp down on future losses, lenders began tightening underwriting standards, particularly in the subprime segment, in 2016. Fitch cited the Federal Reserve’s January 2017 senior loan officer survey:

In the survey, pricing, minimum down payment and minimum credit were all tightened by respondents on a net basis, although the maximum loan maturity continued to lengthen.

So at this point, despite tightening in some areas, lenders continue to lengthen loan terms. Why? Because shortening terms, in face of high prices, and hence unaffordable payments for stretched consumers, would strangle sales volume and profits. But they are getting nervous.

The overall tightening of underwriting standards is consistent with comments made by several banks on earnings conference calls over the past couple of quarters. Fitch believes the tightening of underwriting standards is a response to expected deterioration in used vehicle prices and the weaker credit performance experienced in the subprime segment.

This deterioration in used vehicle wholesale prices came to the fore in the National Association of Auto Dealers’ gloomy report on February: Its used vehicle price index plunged 8% from a year earlier and 13% from the peak in 2014, to hit the lowest level since September 2010. And it’s just the beginning:

Fitch continues to expect used car values to gradually decline over the next several years as used vehicle supply rises driven by increasing volumes of off-lease vehicles, which are expected to increase by over 50% between 2015 and 2018.

So Fitch expects lease turn-ins to surge by 50% between 2015 and 2018. These are the vehicles that customers turn in at the end of the lease and that are then sold at auction. Dealers buy them and retail them.

This surge in supply comes as rental car companies are “rightsizing” their fleets, and their units are flooding the auctions. And it comes as automakers are piling on incentives to sell down bloated dealer inventories of new vehicles and keep plants open, thus making new vehicles more competitive with late-model auction units.

New vehicle demand is “believed to have plateaued,” as Fitch put it. This lack of demand, in face of surging supply, pushes vehicle values lower, which adds “downward pressure on lenders’ recovery values and lease residuals.”

“Lease residuals” is a term that has started to crop up in earnings warnings. When you lease a car, the lender puts an estimated value on the vehicle at the end of the lease term. This is the part of the vehicle that you never pay for. The higher this “residual value,” the lower the monthly payment. At the end of the lease, you turn the vehicle in, and it is then sold at auction. As wholesale prices drop, residual values are under water, and lenders are taking losses on them. This is starting to happen.

How big is leasing? It’s huge. Leases account for 30% of total auto financings. Hence the earnings warnings. And Fitch “anticipates” that this chorus will get worse.

Then there are knock-on effects. Bleeding lenders lower residual values on new leases. This causes monthly payments to rise, making the vehicle less affordable for stretched customers, and thus more difficult to sell, just when demand has already peaked, and when subprime is getting crushed.

Let’s hope that the problems piling up in the used vehicle market — and their impact on new vehicle sales, automakers, $1.1 trillion in auto loans, and auto lenders — is just a blip. Read…  Is this the Sound of the Bottom Falling Out of the Auto Industry?

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  67 comments for “Subprime Auto Loans Crushed Worse than in 2009, Auto Industry Bleeds, Knock-on Effects Commence

  1. RD Blakeslee says:

    “Good” news for prudent folks in need of a used vehicle: Repossessions will further bloat inventories and prices will fall faster and farther.

    Tip: Get access to a wholesale vehicle auction and buy a vehicle there.

    • Spanky Bernanke says:

      Yes! And, pay with cash to keep from paying higher interest due to tightening (although most regionals and credit unions still haven’t raised them much). Somehow, I don’t see the Fed, or commercials raising rates? The recession will be debt-deluged and the Fed waiting way, WAY too long to raise them. There will be no amazing turnaround from cash-for-suckers programs. The law of diminishing returns will overrule Keyensian can-kicking. If you can wait a year, you could make an awesome deal.

  2. TJ Martin says:

    What recently surprised me for all the hype in the automotive industry news about Subaru’s booming sales etc etc is that Subaru is now offering 4 year – Zero money down – Zero interest loans to qualified buyers on new car purchases . Subaru ! Zero ! Supposedly the one automaker not sitting on a glut of inventory ! So I guess the TV character ” House ‘ was right when he said ;

    ” Everybody Lies “

    • Ethan in NoVA says:

      I bet they qualify no-one, or the zero interest financing wipes out other discounts that are more valuable.

      • TJ Martin says:

        Call that a bad bet . An elder 80+ family member and two friends just walked away with three Outbacks with the Zero Down – Zero percent – 4 years loans . And after calling AAA as well as my nearest Subaru dealer to inquire .. no problem for the wife and I as well if we were so inclined .. which we are not .

        So at least here on the Front Range [ Denver-Boulder ] its no Bait & Switch … they’re qualifying em as fast as they can get em

    • chris Hauser says:

      subaru buyers pay their bills. now as to ford gm and chrysler………

      i feel okay about gm. they have enough depth to bounce.

      • Pat McKim says:

        Your kidding!!! they have enough depth because they got a federal bailout? Ford has always been better run than either GM or Chrysler which is why they didn’t need or want a Federal bailout. Next there won’t be a bailout unless they bring all manufacturing back to the US. GM is doing well in China and China is about to have bubble popped. Get with the program

    • MC says:

      As part of the typical “bailout masquerading as M&A”, Fuji Heavy Industries, owners of Subaru, bought the Lafayette, Indiana, Isuzu plant in 2001.
      Until early last year the plant was mostly used to assemble Toyota Camry’s from knockdown kits for the US market: Toyota is one of Fuji main shareholders and the Lafayette plant had already been used to manufacture Honda’s under contract.
      Toyota expanded their Georgetown, Kentucky, facility to accomodate all Camry demand and possibly some, so that left the Lafayette plant with nothing to do but manufacture Subaru cars full time.

      This Subaru manufacturing facility has a massive manufacturing capacity and has always been operating well below maximum capacity. It’s kept open (for the two persons who may wonder) by generous tax breaks from the State of Indiana and Tippecanoe County.

      Car manufacturers have learnt absolutely nothing about overcapacity since 2008. Their factories are working furiously around the clock to add more stock to a world already drowning in it (VAG dealerships in China now sit over 180 days of stock, let’s see how Wolfsburg spin that): last year Hyundai’s Ulsan factory built an astonishing 1.35 million cars and the Korean chaebol plans to reach the 1.4 mark this year.
      This is not even ridiculous anymore.

      • Pavel says:

        Interesting info re the Indiana Suburu plant. When I went with my dad to the Sub dealer the other week the salesman mentioned “many” of the new Subs are made there rather than in JP.

        It seems that there is just a worldwide glut of automobiles yet the car companies just keep pumping them out. Meanwhile most in the US don’t have $500 in savings? So they are selling all these subprime loans…jeez, what could possibly go wrong?

        The US taxpayer bailed out the car companies so many times. I read how much of the GM “bailout” money went to the dealmakers (Blackrock? some crony capitalist pals of Clinton & Obama IIRC) and each job saved cost the US govt about $600,000 (or was it more?). What a frigging joke.

      • ru82 says:

        Thanks for the info

  3. Paulo says:

    I talk to people who have financed a vehicle purchase this decade and they all have one shared point of view, “What is the monthly payment, and what is the nicest vehicle I think I can afford”? All the little add-ons at purchase time is a real shock!! This is pretty scary stuff, for we all know the underlying assumption is that there will be no ‘downside’ in income or expenses over the term of the loan.

    Those of us with a few grey hairs know very well that unemployment can happen to anyone, people get sick, or whatever.

    My truck is 31 years old this year. :-) I have 310,000 km on it and it does not burn a drop of oil. My wife’s Yaris is 8 years old. It runs like a top and we still think of it as a ‘new’ vehicle. Go figure.

    From Fargo:
    Customer: We sat here right in this room and went over this and over this!
    Jerry: Yeah, but that TruCoat–
    Customer: I sat right here and said I didn’t want no TruCoat!
    Jerry: Yeah, but I’m sayin’, that TruCoat, you don’t get it and you get oxidization problems. It’ll cost you a heck of lot more’n five hundred–
    Customer: You’re sittin’ here, you’re talkin’ in circles! You’re talkin’ like we didn’t go over this already!
    Jerry: Yeah, but this TruCoat–
    Customer: We had us a deal here for nine-teen-five. You sat there and darned if you didn’t tell me you’d get this car, these options, without the sealant, for nine-teen-five!
    Jerry: All right, I’m not sayin’ I didn’t–
    Customer: You called me twenty minutes ago and said you had it! Ready to make delivery, ya says! Come on down and get it! And here ya are and you’re wastin’ my time and you’re wastin’ my wife’s time and I’m payin’ nineteen-five for this vehicle here!
    Jerry: All right. I’ll talk to my boss. See, they install that TruCoat at the factory, there’s nothin’ we can do, but I’ll talk to my boss.
    [Jerry leaves the room]
    Customer: [to his wife] These guys here–these guys! It’s always the same! It’s always more!
    [Other room]
    Jerry: You goin’ to the Gophers on Sunday?
    Salesman: Oh you betcha.
    Jerry: You wouldn’t happen to have an extra ticket?
    Salesman: You kiddin’!
    [Jerry returns to his office]
    Jerry: Well, he never done this before. But seeing as it’s special circumstances and all, he says I can knock a hundred dollars off that Trucoat.
    Customer: One hundred–You lied to me, Mr Lundegaard. You’re a bald-faced liar. A fucking liar.
    Customer’s Wife: Bucky, please.
    Customer: Where’s my god damn check book? Let’s get this over with.

    • Libre says:

      This happened to my wife and I many years ago at a Chevy Dealer in the Midwest when we were shopping for a new car and talking about the ridiculous low trade in value he was offering. 1st time he left the room, he came back with a paltry $200.00 more, I got up out of my chair and asked my wife to do the same. He immediately went into panic mode and asked for a second chance to talk to his boss. He left, but this time, I followed him ( clandestinely-about 40ft behind) and saw him go into a distant conference room. No boss, no phone. I watched him do nothing more than light up a cigarette, by himself. When he was about to finish I quickly made it back to my chair. And when he came back to be with us he said his boss said he could do no better. We walked out ignoring his pleas to go for Round 3. That was the last time I went to that dealer. I have heard other people say similar things. I have known car salesmen, and sales managers, most are cut from the same dirty cloth.

      • Paolo says:

        Actually, at Toyota dealerships they never play this games. In many dealerships all over the country. Just switch and forget about all this trouble.

        • hidflect says:

          I had a rare Toyota import and somebody smashed the rear quarter window to steal nothing from the inside. I went to a wrecker and was quoted $150. So I reluctantly checked the Toyota delaership. $45. The dealer explained that Toyota has a parts guarantee for any Toyota vehicle. They will only charge the price of the part the same as it costs in Japan.

  4. unit472 says:

    One wonders about the ancillary effects of declining auto sales. States and local governments make money on sales taxes and registration fees. These will take a hit which will make it even more difficult make pension plan and muni bond payments. Then there is Uber and Lyft. As use of their services increase the need of many, in particular, urban residents to own their own car will decrease which would feed back into state and local revenues and parking and traffic ticket revenues decline.

    • chris Hauser says:

      it occurs to me that in urban areas a lot of people are paying for their cars with some lyft, so to speak, to get uber the hump.

      and people who are not paying for cars are hiring said cars and drivers.

      it occurs to me.

  5. Joanrn says:

    Hi wolf nation, I have been following for about a year but never commented before. I feel the need to share my thoughts regarding used car sales. Climate change affects the quality of used cars. Flooding and extreme temperatures affect those cars. Never buy a used car that is from a flood area. This is not limited to but affects Texas, California, as well as the East and Southeast areas of the United States.
    I continue to repair and maintain my three >11 year old vehicles. It is now cost effective to maintain an older vehicle over buying a new one. I also prefer to be supportive of my locally owned and operated auto repair shop, then a multinational corporation.
    Thank you for all the articles on wolf street.

  6. Mike R. says:

    This expansion is getting very long in the tooth and is over in many sectors (auto sales, retail for example) but soon to run out of steam in others (construction of all types).

    The opportunity to keep things going with a major fiscal stimulus is probably past in that it takes time for these things to ramp.

    I suspect we will be in a deep recession starting as early as this summer. The Fed is largely helpless and Trump/Congress not much better.

    This could be the perfect strom lining up as we have no ‘leaders’ now that are insiders willing or knowledgeable on how to keep all the balls in the air at once.

  7. Paid Minion says:

    Subprime mortgages were such a good idea, they were extended to an asset class with a well documented history showing the depreciation of the asset.

    Not even discussed is how many people will actually have a decent paying job for seven years straight. Or how much of this financing has been given to people whose intention is to flog the asset until it’s worn out, then let the bank take it back ( like Uber drivers, maybe?). Or flog it without putting any money down, or making any payments, and dare the bank to find it and repo it? (Uber drivers?)

    Next up (if not already here)……….10 year, zero down loans on motorcycles and ATVs

    And, as usual, the promotions, salaries and bonuses for the banksters will be calculated by loans originated, not by how many are actually paid off in 6-7 years.

    It’s become obvious that there is no courage or will in any part of the government to put a leash around these predators. Partly, it’s self interest. Without “fog a mirror” loans, where would the economy really be?

    I find myself channeling my inner Kyle Reese:

    (Shouting): “You still don’t get it!! The banksters will find you! That’s what they do! That’s ALL THEY DO! You can’t stop them. They will wade through you, reach down the Average Joe’s throat, and pull his effing heart out!”.

    • MC says:

      0% EAPR on motorcycles were a reality in most of Europe until 2008 and 2009. Part of the reason Harley-Davidson needed to be bailed out by Warren Buffett (long story) was because their financial division was more or less ground zero for toxic moto loans.

      And guess what? They are back. Honda is doing it on “selected models” right now.

  8. akiddy111 says:

    I read recently that less than 20% of new vehicles are purchaed in full with cash. Is it actually that low a number ?

    Does that include trade in plus cash or is that number strictly someone walking onto a dealership lot and writing a check for a brand new car. Anyone know ?

    • VegasBob says:

      When I paid cash in 2011 in the Portland, Oregon area, I asked the dealer about that.

      He said that about 35% of sales are for cash in affluent areas, but only 10% of sales are for cash in less affluent areas. I assume that would include any trade-in.

      The reality is that not that many people can just write a check for $25-60K to pay for a new car purchase.

      • cdr says:

        I wouldn’t worry a lot about bankers and bad loans just yet. Auto loans are not simple interest, they use rule of 78. Most of the interest income is collected at the start of the loan than at the end. 12/78, 11/78 … 1/78 for 1 year. Longer loans apply similar math. As long as the car retains enough value to cover the loan balance, they are good.

        • jodie says:

          how can a car retain enough value to retain a loan balance when they depreciate as soon as they are driven off the lot??

        • Wolf Richter says:

          The rate at with a new vehicle depreciates is not a straight line. And it also depends on the brand and other factors. The moment the buyer accepts delivery of the new car and registers it in their name, the car becomes a used car and depreciates thousands of dollars. Over the next year, it depreciates a lot. Year 2 it depreciates less, and so on. After 10 years, the vehicle has lost much of its value, and each year after that depreciates very little to eventually close to zero.

          I just created this little chart to show in principle how that works. The car would have to be several years old before the amortization of the loan catches up with the actual value. Until then, the buyer is upside down in the loan.

        • cdr says:

          Wolf Richter,

          Yes, you are correct when comparing price to sales value. I was thinking of cost less down payment to possible recovery value. A $30,000 auto has a profit in excess of dealer price. The factory sells to the dealer. Some autos have small margins, some have big.

          I suspect that relationship is far more linear, but, still, nobody wants to recover an asset under these circumstances.

          The rule of 78 also softens the blow.

        • cdr says:


          you’re thinking price to value. I’m thinking cost of sales less down payment to recovery value. That $30,000 car might have cost $21.000 to mfgr (just guessing – but I’m guessing it’s pretty big especially if the car is upscale and loaded.

          Here’s an exaggerated example for illustration only:

          Price $30000
          Cost to mfgr: $20000
          Down payment $5000
          Factory financed

          Your exposure to loan $25,000
          My remaining amount to recover $15000

          Isn’t math cool?

  9. dwkunkel says:

    About 6 years ago, my wife’s car was due for replacement. It was almost 20 years old and parts were starting to become hard to find. One afternoon when we were coming back from the market in Sunnyvale, we decided to stop at the Ford dealer.

    They were having a sale on the Ford Focus, my wife likes small cars, so we thought we’d check one out. We talked with a salesman who took us for a test drive. We didn’t like the Focus at all, but decided to have some fun.

    We went into the salesman’s cubicle where he started the car salesman’s pitch. He told us we could buy the car for only $19,800. We countered with an offer of $18,900. He went back to the salesman’s secret room to, “Check with his manager.”

    When he came back, he said we could have the car for only $19,500. We countered with an offer of $18,200. Every time he came back with a new offer, our offer went down another $500 or $600. After a few iterations of this, he said in frustration, “You can’t bargain that way!”

    We said, “You bargain your way and we’ll bargain our way.”

    When we got back to our car, we both burst out laughing. We didn’t buy a car, but we had a lot of fun bargaining.

    • cdr says:

      Those little cars have only a few hundred $ margin. You need a factory incentive, either from the dealer to you or from the factory to the dealer, to get a really good discount. They would have taken a loss at your price without one.

      I have a 2003 Pontiac Vibe that runs like new and looks great. It’ a 2nd car and sits a lot. The trade in value is only a couple of thousand, even in this really good condition. I’d feel safe driving it across country a few times, but a little cramped. A replacement would cost $20,000+ and be only a little better. I’m going to use it until it dies or I win powerball. Blame me for the car maker problems.

    • ft says:

      I’ve dealt with this same dealer a few times over the years and can safely say that everything you hate about working with auto dealers will be experienced in their showroom. The last straw was when the closer shook hands on a deal, and then backed out of it wanting more $$.

    • Cyrus says:

      They said $19,800, and you countered with an offer of $18,900. You are way too extravagant with your counter offers.

      My counteroffer in such a case would be at best $16,500. The only time that I make a better counteroffer is if I have already one my homework of calling around, and know that there is no chance they would go that low.

      For my second car, a dealer suggested $21,000 for a car, and I bought it for $18000 in cash, and they hate cash deals since they won’t make money on the finance.

  10. Roman T. says:

    In SD they claim a used car shortage, but I doubt there’s really a shortage.

  11. DG says:

    From the local (Phoenix AZ) Warren Buffett owned Ford Dealer today( excuse the CAPS) :

    Over a 1000 new vehicles in stock and 300 used ready for immediate delivery. Ford is also shipping another 1000 new units in the next 90 days so its time to get rid of the ones we have NOW! I WILL BE GIVING AWAY WITH EVERY PURCHASE, NEW OR USED, A VACTION PACKAGE. THAT’S NOT ALL…….ANY NEW CAR DEAL BEFORE 12 FRIDAY 3/24 SATURDAY 3/25 SUNDAY 3/26 GET 2 50in FLAT SCREEN TVS.
    BRAND NEW F250S $10,000 OFF
    0% UP TO 72 MO
    CASH BACK UP TO $25,000

    yeah, this looks like business as usual…

  12. michael Engel says:

    A car is a big cost center. It have to do a job.
    If your car was purchase in order to impress your kids, or neighbors, or
    a new girlfriend, you might decide to purchase a new expensive car.
    But if you drive only very few thousands miles per year, and most of
    the day the car park in front of your house, does nothing, and you don’t care about status, it make sense to keep your aging car. Even if your mechanics suck few hundreds dollars per year, out of your pocket, for maintainance & repairs.
    The car biggest asset is, when it’s has a ZERO book value and runs like a virgin.
    you got a real winner !!

  13. Joe says:

    Question for Wolf: How did Fitch rate the debt this time around? Or was it rated at all?

    • Wolf Richter says:

      Fitch rates bond issues and issuers. ABS are bonds and as such are individually rated. The index I cited, which includes many bond issues, tracks actual losses for the bonds in the index.

      The report does not have the ratings for individual ABS issues (if you have the CUSIP number for a particular ABS, you can look up its ratings by all agencies that rate it). But the report does have the ratings for the issuers that Fitch tracks, including Ally, Ford Credit, GMF, etc. Fitch sent me the report but it is proprietary so I cannot post it.

    • Wolf Richter says:

      Oh, and if you want to know the ratings of the finance companies that are rated in the report, let me know and I’ll write it up as a comment, no problem. (I just cannot make the actual report publicly available).

  14. Jack says:

    I love it when Wolf discusses car issues. We have 2 old Jaguar saloons (4 dr sedans) that we drive regularly everywhere. Both are impeccable and draw looks and discussions whenever we pull over. Neither have cost us ” that” much money to repair.
    However, when we go on the road for a very long vacation, 2 weeks or more, we always go online and get a nice rental. Just got back from a 2 week trip to Florida. Drove over 2600 miles round trip. Got a great deal on a new RAV 4 from Enterprise. It cost us $140.00 for the 2 weeks including taxes etc etc.
    Why buy a new car to travel in when you can get a rental on the cheap. Loved the car– just don’t want to own one. Don’t want the monthly payment nor do we want to pull this kind of cash out of our savings.

    • Kent says:

      Same. Took extended family from Florida to North Carolina in a rented Grand Caravan. $260 for a week. Why would I ever buy a large vehicle when I rarely need one, and they’re so cheap to rent?

  15. Jimmy says:

    No worries guys, every Trump failure is now causing the market to reverse losses. Just look at today, after the vote debacle, VIX was crushed back to negative territory.

    Market climbing though the wall of worry.


    • Linda T says:

      The Vix is crushed back to negative territory any time the Major Indices are red…Citadel and the PPT has been banging ViX at 3:30 since 2010…Where have you been…The VIX, sheesh….

  16. JB says:

    Wolf on a lease does the selling entity ( receive the full amount of the vehicle price (net of dealer profit) at lease signing time ? Also from what i gleaned from your article the lending /financing entity takes the loss when at resale time of a off lease vehicle they don’t capture all of the residual value . i am trying to determine what entities take a hit respective of the players (i.e dealer, supplier, financing company, ABS note owner) in the above mentioned scenario.

    • Wolf Richter says:

      On a purchase deal, the sequence of ownership is like this:

      Ford sells car to dealer at invoice less various items => dealer owns vehicle => dealer sells to customer and dealer may also arrange financing for the customer (from Ford Credit, a bank, or other finance company) => customer drives off owning the car.

      On a lease, it works like this:

      Ford sells car to dealer at invoice less various items => dealer owns vehicle => customer signs lease with leasing company, dealer sells car to leasing company at the price implied by the lease terms that have been negotiated with the customer and approved by leasing company (this tends to be very profitable for the dealer; customer has no clue what this price is) => leasing company leases the car to the customers (like a long-term rental contract) => at the end of the lease, customers turns car back to leasing company (often via dealer) and walks away (or leases/buys something else) => leasing company sells the car at auction => some dealer buys it and retails it as 2-3 year-old used car.

      When a lease turn-in sells at auction for less than its residual value, the leasing company takes the loss. If the leasing company, like Ford Credit, is owned by the automaker, ultimately the automaker takes the loss. If the leasing company is independent, it eats the loss (investors and bondholders).

      • cdr says:

        As I mentioned above, sales price is being confused with cost of sales.

        Plus, with dealer financing, the profits rise a lot more.

        For example (exaggerated and probably a little inaccurate but good enough for horse shoes)

        Sale $35,000
        Cost of sales $22,000
        Down payment $5000
        Amount financed (by factory) $30000 with interest earned on this amount also recognized using rule of 78

        profit $8000 plus interest on loan less accounting exposure at maximum $17000 ($22,000 – $5000) and cost of working capital – low thanks to Fed and interest rate manipulations.

        So, if perhaps $1000 is lost on recovery or lease return and not recoverable from original borrower, it’s far less painful than it might first appear.

      • jb says:

        thanks , does smack of circa 2008 subprime
        mortgage meltdown and the rating agencies
        not properly reflecting risk on the MBS issuance. Wondering if the subprime ABS tranche is included with prime tranches. This era of neo financialization makes my head spin.
        Your articles make me dig deeper into this esoteric realm.

    • Leslie2024 says:

      When I worked for Ford Credit many years ago, the lease terms were bought by Trans union and they took the gain/loss. I will say we called leasing “fleecing”. I tell my friends and neighbors that and they just do not believe me.

      • Adam says:

        Check lease hacker . com and you will change your mind. The only one doing the fleecing there is the customer.

  17. Ehawk says:

    So What… they will give a car to anybody… Last night my neighbor invited me to BBQ and some of his buddies were talking about cars..

    One of them just got a new truck and has no Job. zero down and No payments for 3 months. I didn’t inquire further about price and such, all I know is that its a GMC.

    They all work construction or landscaping. Even one guy was saying the some carpenters in their crew made 150K last year. I guess they think this will never end. In addition, half of them are undocumented… no legal status and they work with the union…I mean they’re leaving the American dream. I was just hearing things like… I only made 80K and others make 100K, 120K… I only drive a 2012 Chevy but I’m gonna trade it in for a new 2017. Living in the Silicon Valley with stupid rent prices forced me to end up in a shit apt complex with ONLY late model cars parked all over…New 50K trucks everywhere…except my car which will be 10 years old next year.
    * there’s no slowing in constructions
    * Everybody drives a new car
    * there is no crash in housing (only going up)
    * Fast food and Restaurants keep raising prices and always full.

    Too much gloom and doom… about retail, cars, rents, restaurants… nothing ever happens business as usual.

    • chris Hauser says:

      that’s an expensive carpenter. 40 hours a week at 50 weeks = 75 an hour.

      must be fast and good.

      as to vehicles, if you can breathe, have a license, and 500 credit, you drivin’.

      • Frederick says:

        Funny my boss in Sag Harbor NY ( the Hamptons) didn’t even want to pay 20 an hour for carpenters He preferred to train young latinos just arrived and pay them 12 an hour

      • BrianC says:

        In my neighborhood in Wilsonville, OR I typically see crews working the new construction around here 6 days a week. The trucks show up around 7:00am and then leave around 6:00 or 7:00 pm in the evening. Sundays are quiet, but I will occasionally see HVAC, plumbers, or electricians on those days.

        There was no one working Christmas day the last two years, and during *Snowmageddon* there was no work either. Thanksgiving day was quiet this year too.

        If you are billable 60 hours a week for ~51 weeks out of the year, you’re probably making bank…

        Which is the story of contracting. When you are busy, the money is good, but you have no time to spend it. When you are in betwee jobs, there isn’t any money and you better have set something aside for the quiet time… :)

  18. oldfarmer says:

    The viability of long-term loans assumes not only that the borrower will remain employed for 84 months or longer, but that the price of gas remains moderate over that time. A lot of these vehicles are trucks and SUVs; their value drops a lot when the price of fuel goes up.

    • RD Blakeslee says:

      The PRICE of my 23-year-old pickup has varied up and down from its PRICE trend line over the years, I’m sure, just as the PRICE of its fuel has, but that’s immaterial to me. The truck’s VALUE is determined by my use of it.

  19. mean chicken says:

    Was it a year ago when Denver rail yard was packed with locomotives? NSC rally really took off about then.

    • Mary says:

      I may be wrong, but I think NSC took off with the Republican sweep in November. NSC hauls coal and it seems likely the new administration will lift anti-pollution regulations.

      I do most of my charitable giving in the form of stocks with big unrealized gains. (It’s not that I’m such a wily investor; I’ve just lived a long time.) Hoping to achieve a tiny measure of justice in the world, I gave a bunch of inherited Norfolk Southern stock to my local Planned Parenthood office.

      • mean chicken says:

        There was a brief pullback just prior to the election.

        • mean chicken says:

          Quite a number of equities were being sold as the election neared, not just NSC. It might be fair to say the big rally occurred b/c folks thought Trump might turn things around but now are questioning if that will be allowed?

          Even real estate rallied following the election, shorts got roasted.

          The people have to demand it I think, before it can happen. Instead, I’m currently hearing about investment opportunities developing African wildlife habitat.

  20. Thames says:

    “So at this point, despite tightening in some areas, lenders continue to lengthen loan terms. Why? Because shortening terms, in face of high prices, and hence unaffordable payments for stretched consumers, would strangle sales volume and profits.”

    You didn’t say it, but this implies it’s getting worse for the people who typically buy cars and it is getting worse for the new buyers of cars (first time buyers). You are implying consumers have been stretched to the literal breaking point without an inch to spare. This is not an ‘auto crisis’ it’s a consumer crisis.

    My local retail stores are near empty. Any store that is ‘non-essential’ is empty. Everyone is slashing prices. I got the same feeling I had prior to the financial crisis.

  21. hidflect says:

    I went to a car auction just outside Tokyo a few years ago and I was left incredulous. Mint condition, garaged Audis and Lexus’ being sold for $800-$2000. Many with just around 20,000km’s on the clock. Barely worn in. Then this tiny, old, white bongo van (660cc) comes up with a tilt tray on the back. $6000.
    “What the hell?”, I asked my buddy who had the dealer’s licence.
    “People can make a business out of that, It’s worth money. The luxury cars cost you cash the moment you buy it.”
    I saw his point but I couldn’t help think what an enormous waste of money and resources cars were.

    • RD Blakeslee says:

      If one buys a reliable (low service cost), long-lived vehicle and keeps it for the entirety of its long life, it’s enlightening to calculate its price per year of ownership. It may be lower than one might think.

      For example, my 1995 Dodge Cummins diesel pickup: $28,000/22 years = $1,272 per year. AND this vehicle will last for quite a few years yet.

      This principle can justify buying a vehicle new, rather than used, to enjoy the best (earliest) years of its life.

      Also, a new pickup like mine is now over $40,000, even with all the incentives currently offered.

      • Greenland says:

        “if one buys a reliable (low service cost), long-lived vehicle and keeps it for the entirety of its long life, it’s enlightening to calculate its price per year of ownership. It may be lower than one might think.”

        I’m not sure long lived vehicles exist anymore. Complex emissions and other bells and whistles (remote tire pressure management systems), etc have killed the long lived vehicle.

        My guess is that car technology peaked in the early 2000s. Now you have an emission system with a car attached to it.

        I’ve got a newer car and it’s almost impossible to repair anywhere except at a dealership. All (100%) of the local dealerships are hard core criminals, and I now watch my car as they do the repairs.

        All local shops are criminal as well, as there have been no new repair shops in my major metro area for decades. Only shops that own the roof over their heads are in existence ( thank the real estate bubble!). The utter brazen crap you have to take is mind blowing.

        The small time local mechanic who loves cars and values his clients is now largely a myth.

        Anyone, please feel free to mention what are the best made cars for the long haul. I just don’t see it anymore.

  22. Jason says:


    Are there any metrics on productivity losses from humans trapped in senseless traffic?

    I live in Berkeley and commute to various locations for my sales job. Peak rush hour to San Jose is 1.5 hrs compared to 45minutes w/o traffic. San Francisco can be 1.25 hrs compared to 20m w/o traffic.

    Multiply that by ~400k people doing the same every day that’s a lot of manpower gone to waste. Not to mention the stress induced productivity losses after you pry your fingers from the steering wheel.

    At some point the concept of driving our own bodies around in snarled traffic will seem barabaric in retrospect. A form of medieval torture for the masses to entrap them in financial slavery (loans/leases)

    When will we vote for liberation from this self induced highway inferno? Our economy will benifit immensely if we reorganize Capital and labor to align humans with occupations that do not require the vast majority of us to all hop on the highway simultaneously.

    Self driving cars is a bandaid.. might even make things worse.

    Only people that should be on the road IMO are delivery vehicles, tradespeople, field workers(sales, home care, etc), travelers. If you sit at a desk and gaze into a computer you have no reason to be clogging up the highway and wasting your hard earned $$ on these jail cells on wheels.

    • Wolf Richter says:

      There are some studies on this topic of resources wasted due to inadequate or bad infrastructure (road and rail). I run into them from time to time. The numbers are always stunning. I don’t have links off the top of my head, but you can try to Google them.

      That’s why infrastructure spending in the US would have such a big economic payback for decades.

  23. BrianC says:

    I’m an engineer, not a sales guy. I’ve always hated car dealers. So my strategy was to buy used and then maintain the thing and run the heck out of it. I’m 56 years old and have only purchased 4 cars in my life. (Breaking the rule, in 1985 I purchased a brand new Chevy S-10 blazer for 12k and finally donated it to OPB in 2009 with ~275k miles on it.)

    I figure I have *at most* one more car purchase ahead.

    The more interesting thing to me is how many people I know in the PDX metro area that *don’t own a car*. (I always thought that was a New York city/east coast *thing*.) Including the daughter of one of my business partners who is VP of Marketing for some trendy downtown outfit. She and her husband probably clear 200k a year gross, but don’t own a car.

    For me I can remember about 8 years ago sitting down to run the numbers at the end of the year… I had my mother’s old Toyota Camry and was looking at the cost to run it for the last couple of years. I thought I can buy a new bike every two years and a tri-met annual pass and come out ahead if I ditch the car.

    Which was the impetus to get back to riding my bike. A good bike costs $1000 to $1500. The tools to completely maintain it are maybe $500. Best thing is – you can look at the thing and fix everything on it yourself.

    Given traffic around here, commuting from Wilsonville to Beaverton and back is about as fast on the bike/tri-met as it is in the car. Plus it’s cheaper to boot.

    I was looking at my log book at the end of 2016 and for the last couple of years, my average fuel purchase is ~18 gallons every 6 weeks. (This is going to change, because I have two teenage boys in Driver Ed right now. lol)

    Basically – bike more – drive less – bank the savings and retire early* :)

    *Yes, everyone’s situation is unique. What works for me probably won’t translate to your situation…

  24. Betty says:

    My BOA branch office that I’ve used for just about 30 years closes today. Boy that’s a creepy feeling.

  25. Autospec says:

    Seeing with my own eyes, underwater contracts being penciled, example a underwater Dodge Ram 2014 being traded in for a new 2016 model MSRP was 50K, total financed was 77K over 8 yrs at 7% OMG FYI this was financed by one of Canada’s finest 5. 27K of risk + 5K drive off lot loss = better hope they make payments for 8 more yrs

    Oh and Merc & BMW leases here at 40% and growing

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