The Car Repossession Crisis

America is currently going through a bit of a car repossession boom. Delinquent auto debt over 60 days past due is at the highest level it has ever been, including during the global financial crisis. More repossessions than ever have taken place within the last quarter. And even if you don't personally have a car loan, this could still become a systemic issue that impacts you because auto debt as a whole is higher than it has ever been before.

This record debt has also combined with record levels of depreciation to result in massive negative equity for more borrowers, making it harder than ever to back out of these deals, especially on certain classes of vehicles. Now, that sounds pretty bad just on the surface, but it gets worse. Several reports have found that we have slowly made auto lending so complicated and fragmented that between leases, lending, buy here, pay here, cross-collateralized loans, and every other type of way to finance a car, it's become next to impossible to track down how much we really owe and how much is actually being paid back. Even the regulators themselves have basically admitted that they don't really know how bad the problem is and how much this could all hurt regular consumers.

Now, I know this all sounds like yet another symptom of people's personal finances being squeezed, which is by itself not exactly that shocking anymore. However, the current repossession boom is, for now at least, a specifically American problem. A problem that is saying a lot of bad things about the unique ways that we borrow, consume, and go broke. And I don't know, I just feel like a $500 plus car note is absurd. Record number of Americans are falling behind on their car payment. I have $60,000 worth of car debt. Those loans coming with higher interest rates for buyers with limited income or credit scores. The more concerning part, the interest rate being 37% nearly. Well, the repo man is in high demand. They're working overtime. It is draining us. It is taking things away from my children.

According to the recovery database network, car repossessions hit a 14-year high in 2024, only slightly behind their peak in 2009. We have already passed that peak this year, and we still have a few months to go. This is especially concerning because consumer protection laws around repossessions have generally gotten stronger since the global financial crisis, which means the same number of repossessions is an indication that borrowers are in an even worse financial situation.

Today, repossessions have become such a large industry that it's even attracted the tech bros to skirt around regulations. Some of the old tricks like impersonating a target with their utility providers to get their address have been specifically outlawed. So, today repo men take a different approach. Companies like Resolvion and DRN have emerged to fill that gap by creating their own lists. Their business works by driving around camera cars that indiscriminately photograph every license plate they can, including those in private parking lots, and then assigning GPS coordinates to them to build out a database. What this does is let repo men access this database for a fee so that they can get a list of known locations for a specific registration number.

Now, not to go too much down this specific rabbit hole, but some of these companies now work off a gig economy model, because of course they do. They onboard affiliate drivers who attach their camera packs to their own cars and then pay them a commission for every repossession that comes from the data they collect. For a lot of people, this is either an alternative or a supplemental revenue source to driving for Uber that happens a lot more passively in the background.

Now, this kind of involuntary "databaseization" would be bad enough by itself. But you might think, unless you've been skipping your car payments, you don't really have anything to worry about, right? Well, a report by Wired found that these cameras were also collecting and cross-referencing information like politically affiliating lawn signs, bumper stickers, and t-shirts. This let them highlight areas and even individuals with stronger support for certain ideas than others. Now, the companies have claimed that this is just another way for them to earn revenue. It's information that they are collecting from public spaces, and it's not their fault if they are just better at arranging it into databases that can be sold off to political campaigns or marketing agencies.

Anyway, with that tangent out of the way, what is really funding this data collection right now though is car repossessions and business is booming for three simple reasons. The first is the hangover from the price boom of 2021. During this time, new and used car prices both hit their highest levels ever. Supply chains were disrupted and people had a lot of extra spending power thanks to government stimulus and also because other expenditures like vacations and eating out were cancelled. Interest rates were also very low, which all made it easy to get a big loan and pay $30,000 over sticker price for a used Toyota Tacoma.

Today, record loan sizes have mixed with record rates of depreciation to give some all too predictable results. According to Edmonds, the average amount of negative equity in cars and trucks climbed to an all-time high last quarter. Now, so far, the one saving grace has been that prices are still higher than they were before 2020. But that has all resulted in fewer people trading in their cars because they are being forced to hold on to it longer.

Now, on a personal finance level, this can actually be a good thing. You don't need to buy a new car every 3 years. But let's be honest with each other here. People aren't holding on to their cars because they have suddenly become more conscious consumers. They are holding on to them because they can't get out of them. This is even more apparent on EVs that were attracting huge premiums 4 years ago, but are nowhere near as popular as people are seeing problems with long-term battery performance and opting to purchase plug-in hybrids instead. For a lot of people, it's not worth it to make budgetary sacrifices for a car that they are underwater on. So, they are just ignoring the problem and accepting that one day their car will be repossessed.

Now, the good news is that we are just in the find out stage of a very unusual pricing shock in the car market. If that was all there was to it, then as the loans were taken out more than 5 years ago, start to end, things should start getting better, right? Well, it's time to learn how money works to find out what else is behind the car repossession boom.

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Okay. Sinking car prices shouldn't represent a crisis by itself. Outside of a very small handful of exceptions, it is the expectation that cars depreciate rapidly over time. Like most consumer durables, the retailer, in this case the dealers, have their own markups, which is why a new car normally loses so much value at the moment it's driven off a lot. The funny business that happened around CO was very much the exception to this rule.

What really allowed a small little price spike to turn into an economy wide problem is the increasingly complex ways that we are financing car purchases. In the past, it was pretty straightforward. You would pay for a car in cash or you would make a down payment and pay back the rest over a set term. This was almost always 5 years. Today, the variety of car financing options has grown significantly, and almost all of them are designed to let people get into a slightly more expensive car than they otherwise would have been able to afford. According to Experian, over 80% of new vehicle sales are financed. But because the industry is so fragmented and under-regulated, some third party estimates put that number as high as 85%.

Outdated ideas like having money to use as a down payment have also become a thing of the past over the last two decades. This has slowly been replaced by people using the equity they have built up in their previous car to use as the down payment on their next car, re-extending the loan term and principal. Sometimes even that is too much. The rate of trade-ins where the previous car has more owing on it than it's worth has hit its highest level ever with one in four cars being traded underwater. Dealer financing is still pushing through these sales though, even if they have to get creative with car values because of the biggest broken incentive of all. Dealerships aren't really in the business of selling cars. They are in the business of writing loans. The cars are just something that get borrowers in the door.

Now, while this fact alone might not be that surprising to you anymore, it has encouraged continuously pushing the bounds of what is normal in car loans. The financing manager at a dealership obviously has commission incentives of their own. But they are also colleagues with the sales staff who will depend on them to get a deal done. If they want everybody to get paid and avoid awkward silences in the break room, there is a real incentive to write a loan by any means necessary. This actual peer pressure is at least part of the reason why delinquencies on dealer loans are more than double that of loans from other sources. According to data from the Consumer Credit Panel of the New York Fed.

Now, if lowering lending standards and down payments wasn't enough, the biggest lever that the industry has been pulling is extending loan terms. 5-year loans have gone from being the industry standard to now being less common than seven-year loans. According to market data compiled by Bloomberg, a growing number of lenders are now offering terms of 144 months for loans up to 120% of the car's value. In plain English, what this means you could do is trade in a car that you are $10,000 underwater on, put no cash down, and take out a $60,000 loan to buy another $50,000 car, which you will be paying off over the next 12 years.

Now, the interest rates and fees on these loans are usually nothing short of catastrophic. But spreading the loan out over that long does minimize monthly repayments. And since most of these borrowers are going to trade in their car again before paying down the loan, that's all they really care about. As people are increasingly taking out six, seven, or even 12-year loans on cars that they are on average replacing every 3 and 1/2 years, they are making very little progress on the principle of these loans and therefore extending the period in which they could suffer serious financial difficulties. The Consumer Financial Protection Bureau, while they still exist, highlighted this as one of the most damaging financial practices in the economy today and highlighted it as one of the leading causes of loan delinquencies.

So, lenders shouldn't exactly be shocked Pikachu that the repossession rates are skyrocketing, but they are going to keep going on, not just because it makes them money, but because it makes money in the right kind of way. As terms have gotten longer, loan sizes have also increased, which has also allowed us to buy more expensive cars. I mean, who knew extending loan terms and equity requirements would just drive up prices on underlying assets? But anyway, the bigger issue is that these loans have become a valuable asset class of their own. When a dealer writes a car loan, they are usually using a third party credit provider to actually pay out the money. As part of that deal, those providers will pay the dealer a commission for the business they are bringing them. And the longer the loan term, the bigger that commission is. Most of these loans then get securitized and sold off to other investors so that neither the lender or the dealer needed to use any cash of their own.

Now, the paperwork involved in doing all of this costs a bit of money, but that is a fixed cost. It takes just as many man-hour to put together a 3-year loan as it does a 12-year loan, but the lifetime interest on the ladder is almost six times higher, making it far more profitable for these middlemen. Now, if you think that's bad, don't worry. It gets worse. Turning people's transportation into a recurring revenue stream still has challenges because of silly little things like regulations and lending standards. They might be on the floor, but they are still there. Fortunately, a new model of car subscriptions is becoming increasingly popular. So, um, yeah, can't see that going badly.

The final change pushing the repossession boom is that all of this is starting to catch up with higher income earners as well. When we think of people getting their cars repossessed, we naturally think of people with bad credit, unstable employment, and poor financial literacy. Now, subprime customers like this do still make up a majority of loan delinquencies and subsequent repossessions, but that is more or less a constant. Amongst this group of borrowers, there was a brief improvement in their loans around 2020 thanks to stimulus, lowered interest rates, and deferments on other debt. Today, however, the delinquency rates on their borrowing is more or less back to where it was before the pandemic. It's not good, but it's predictably not good. The assumption that a lot of these loans will not be repaid in a timely manner is why subprime auto loans have much higher interest rates.

The real difference right now is an increase in delinquencies coming from people with average or even above average credit. Late payments amongst these groups have roughly doubled since before the pandemic. And even though the rate of their delinquencies is lower, they are a much larger group overall. So the total volume of bad debt is really starting to creep up. We have mentioned it in almost every video this year, but the top 10% of households now account for over 50% of all consumption spending. Now, this statistic normally highlights the growing K-shaped economy. But it doesn't necessarily mean that everybody in the top 10% is thriving either. A report by Goldman Sachs found that 40% of studied households earning more than $500,000 a year were living pay check to pay check. The top highlighted reasons were lifestyle inflation, living in expensive cities, and cars. Ironically, the households earning only $200 to $300,000 a year were doing considerably better because they were less likely to be surrounded by people who think half a million dollar weekend cars and vacation homes are a reasonable expense.

Now, we are actually going to make an entire video about how the 1% is bankrupting themselves later this month. So, make sure to subscribe if you're interested in that. Of course, there is more to it than just cars, but generally all of the financial shenanigans that have evolved over the last decade have been directed towards people with higher incomes. They are generally trusted with far more dangerous financial tools. And if they lose their high-paying jobs, which a lot of people are at the moment, they are every bit as likely to end up in the same financial trouble.

Now, all of this is just one side of the story. The problems in the car industry are even more apparent on the manufacturer side. So, go and watch this video next to find out how and why these companies have dug themselves into such a strange hole. And don't forget to like and subscribe to keep on learning how money works.