… it’s the loan STANDARDS
What if your bank charged 0% for a $300,000 mortgage? You’d be pretty darn happy, right?
But what if to qualify, your bank also said you needed an 800 credit score … a down payment of 70% … $1 million in cash on deposit at the bank … and a debt-to-income ratio of 5%? Forget about it! Neither you nor anyone else could get your hands on that loan.
That’s an extreme example, of course but it illustrates a key point: When it comes to borrowing money, it’s not just the interest rate that matters. It’s the lending standards of the institution handling the loan.
I’m bringing this up because banks are doing something now that they didn’t do in the last six-plus years. They’re tightening standards. The process started in commercial real estate lending a few quarters ago. But now it’s spreading, with auto loans a key focus area.
Take a look at this chart, which is based on quarterly survey data from the Federal Reserve. It shows the net percentage of banks, tightening the lending standards on cars and truck loans, versus loosening them. The higher the bars, the tighter lenders are getting – and vice versa.
You can see that banks were giving out car loans like Halloween candy between 2010 and early 2016. Subprime lending exploded, just like it did in the mortgage industry in the early 2000’s. That helped artificially inflate auto sales, just like easy mortgage money inflated home sales more than a decade ago.
But you can also see that the tide is turning now. Banks are starting to crack down (belatedly) on the flow of easy money. That’s starting to crimp vehicle sales, and I believe this problem will get much, much worse this year and next.
My advice? If you’re on the bubble when it comes to qualifying for a car loan, get one now. And if you’re invested in shares of auto makers, auto parts suppliers, auto lenders, or any other company with heavy exposure to the industry, dump those shares and don’t look back. This is going to get ugly.
Until next time,
Mike Larson is a Senior Analyst for Weiss Research, and is also the creator of the course “How to Profit From Rising Interest Rates”. A graduate of Boston University, Mike Larson formerly worked at Bankrate.com and Bloomberg News, and is regularly featured on CNBC, CNN, Fox Business News and Bloomberg Television as well as many national radio programs. Due to the astonishing accuracy of his forecasts and warnings, Mike Larson is often quoted by the Washington Post, Chicago Tribune, Associated Press, Reuters, CNNMoney and many others.