Subprime Deja-Vu: Auto Loans Echo Mortgage Crisis

[vtsnowedin]

Any substantial and sudden increase in fuel prices would be expected to reduce the value of large four wheel drive gas guzzlers, and might in theory lead to loan defaults and the repossessed vehicles being worth less than the outstanding loan. Not very likely IMHO, not many people sell a working vehicle due to fuel prices, though they might consider a more economical one next time. And even if a repossessed vehicle was worth less than the loan, the difference is small as compared to most mortgages.

I have seen people ( again perhaps not the sharpest) respond to a sudden jump in gas prices by trading in a large SUV for a smaller fuel efficient car. They lost about $7000 dollars on the trade. They will have to drive the small car about 40,000 miles to break even with $4.00 gas.

[Tarrel]

Any substantial and sudden increase in fuel prices would be expected to reduce the value of large four wheel drive gas guzzlers, and might in theory lead to loan defaults and the repossessed vehicles being worth less than the outstanding loan. Not very likely IMHO, not many people sell a working vehicle due to fuel prices, though they might consider a more economical one next time. And even if a repossessed vehicle was worth less than the loan, the difference is small as compared to most mortgages.

I have seen people ( again perhaps not the sharpest) respond to a sudden jump in gas prices by trading in a large SUV for a smaller fuel efficient car. They lost about $7000 dollars on the trade. They will have to drive the small car about 40,000 miles to break even with $4.00 gas.

Also, general pressure on personal finances could cause someone to have to sell their car, even if it is not the optimum time to do so. If said car has dropped in value as it is a gas-guzzler, then they could find themselves under water. So, they either keep the car but can't afford the payments, or they sell the car and don't have enough equity to clear the loan. Either way, the risk is default.