Will sub-prime car loans spark the next financial crisis?

Banks and newspapers have been reporting recently that the boom in new car sales since 2013 in Europe and the US is based on giving car loans, PCP’s and leasing contracts to ever riskier borrowers. But some pundits go further, suggesting that the bonds sold to investors based on car loans – so, called ‘ auto -asset backed securities’ (Auto ABS) – could face dramatic falls in value as a result of this risky lending. In that scenario, not only would new car sales feel the pinch, because auto finance companies would not be able to re-cycle their funds into more loans so readily but – as far as the most alarmist are concerned – possibly the entire global economy could face a new financial shock. They say that the trend in financing new cars with PCP’s and 5-year plus loan durations mirrors the mis-selling of ‘sub-prime’ mortgages back in the first decade of the new millennium. This post looks at the way Auto ABS is created and managed in the post -global crisis period and concludes that, while dealers should expect the boom in new cars sales to slow in the US and the UK, there are now enough safeguards built into the financial system to avoid a calamity. Some bonds may fall in value. So too may residual values, particularly for diesel engine cars. However, the conclusion is that the scale of the sub-prime Auto ABS market is not large enough to spark a regional downturn, let alone a global one.

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