Why Graham Stephan Believes 'Too Many' People Have Locked Themselves Into Pricey Auto Loans

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  • Many people have no choice but to finance a car via an auto loan.
  • Because cars have been so expensive and consumers haven't been shy about borrowing, we could be headed toward an auto market crash.

It's a really big problem.

Some real estate experts have been sounding warnings about a potential housing market crash. But that's unlikely to happen for a big reason.

Right now, there's a very limited supply of homes on the market, and buyer demand is still strong. Even if buyer demand wanes due to factors like rising mortgage rates, the reality is that property owners are sitting on record levels of equity. So we're unlikely to experience a scenario like we did in 2008, when foreclosure rates soared and homes started flooding the market at a rate that outpaces demand.

But while a housing market crash may not be imminent, real estate expert and YouTube personality Graham Stephan worries that the auto market may be headed for some major upheaval. And that's something consumers should be mindful of.

Consumers have been borrowing too much

Most vehicle purchases are financed via an auto loan, and understandably so. But unlike mortgage lenders, who tend to impose strict borrowing requirements, auto loan lenders aren't very strict. And so it's pretty easy for the typical consumer to get approved to borrow for a car, even if they can't really afford the payments they're taking on.

Plus, car buyers with poor credit tend to get stuck with expensive borrowing rates. That means they might struggle more than the typical buyer to keep up with their auto loan debt.

Stephan estimates that 25% to 50% of auto loans are given to consumers who may not be in a position to repay them. And now, 5% of auto loan borrowers are behind on their payments, and almost 50% are underwater on their car loans -- meaning, the amount they owe on their vehicles exceeds the value of those vehicles themselves. All of this is very reminiscent of the housing market crash of 2008, only here, we're talking cars, not homes.

But the underlying issue is the same. Stephan thinks too many people have committed to auto loans they can't afford. Those unable to keep up with their payments -- whether due to job loss or another reason -- won't be able to sell their cars for as much money as they owe their lenders. And people in that scenario risk having their cars repossessed, similar to how many homeowners were foreclosed on during the housing market crash of 2008.

But if that situation comes to be, the auto market could easily get flooded with inventory. That's not necessarily a bad thing for those consumers who are in the market for a car. But it's a bad thing for the auto industry and the economy on a whole (because really, nobody wants to hear about auto makers getting a bailout).

Borrowers need to be careful

It's too late for existing auto loan borrowers to go back in time and not take out pricey loans they can't really afford. But those in the market for a car now should be mindful of how much they borrow -- and also be mindful of inflation as it relates to vehicle prices.

In fact, right now is actually a bad time to buy a car because inventory is still down, vehicle prices are high, and borrowing rates are rising. Those who need a car immediately may not be able to delay that purchase. But those looking to upgrade a functional car may want to sit tight and wait for more inventory to hit the market -- whether as a result of supply chains opening up or an uptick in repossessed vehicles.

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