Credit crunch and debt sustainability issues: US capital turns negative
Millions of Americans who took out loans to buy overpriced used vehicles during the pandemic are at risk of going flat in the red. Financing costs are soaring and used car values are falling, culminating in a perfect storm in which only the tip of the negative equity iceberg appears.
On Tuesday, credit analyst firm TransUnion and market research firm JD Power released a new report warning that in recent quarters, loan-to-value ratios (LTVs) of used cars at the time of ignition have “gone in the wrong direction for consumers”
LTVs at origination in the first quarter averaged 125%, compared with 110% for used cars in the same quarter a year prior, and were up 21 percentage points over the same period in 2021. Lower LTV indicates that the borrower has more principal in his auto loan, while one above 100% means the loan is over value.
“With vehicle prices rising and overall inflation remaining high, consumers are increasingly starting to have above-average LTVs to afford used vehicles. It is more important than ever that consumers effectively manage their payments to stay within their budget, while allowing for a cushion for other ongoing expenses such as insurance and repairs,” said Satyan Merchant, senior vice president, head of business TransUnion car.
Merchant predicts that the “accelerated depreciation” of used vehicles will cause an increase in negative principal borrowers in the coming quarters . This aspect will be particularly important for lenders to monitor”. We are probably only seeing the tip of the negative capital iceberg, because the crisis, if it continues, will further reduce the values of purchased assets, from new and used cars to real estate, thus making the LTV worse
The note explains that the borrowers are overleveraged with monthly payments of $1,000 for used cars. Only when the next recession hits and unemployment rises will a surge in delinquencies give rise to a flood of foreclosed vehicles flooding into the used-car market, driving prices down further. The crisis feeds on itself by generating even more crises.
Thanks to our Telegram channel you can stay updated on the publication of new articles from Economic Scenarios.
The article Credit crunch and debt sustainability problems: capital turns negative in the USA comes from Scenari Economici .
This is a machine translation of a post published on Scenari Economici at the URL https://scenarieconomici.it/stretta-creditizia-e-problemi-di-sostenibilita-del-debito-negli-usa-il-capitale-diventa-negativo/ on Wed, 21 Jun 2023 10:00:46 +0000.