Subprime Problems Could Spread to Auto, Commercial Loans

As the year ends, the economic problems caused by the crisis in the subprime mortgage market seem to still be growing. Now, some experts are predicting that in 2008 more consumers will have trouble paying their auto loans, and that more businesses could file for bankruptcy.

The research firm Global Insight is predicting a 13 percent increase in business bankruptcies due to slower economic growth and an increase in the cost of commodities, according to a story last week by the Associated Press.

Rating agency Standard & Poor’s reviewed firms that issue debt it considers “speculative” and estimated that 56 of the companies would default in the next 12 months. That’s a rate of 3.4 percent, compared with less than 1 percent in 2007, the AP reports.

For consumers, auto loans are in danger of becoming the subprime mortgages of 2008, according to a story today in the Detroit News.

American consumers have been “signing larger automobile loans for significantly longer terms than they used to,” according to the paper. For instance, the average amount financed on a car purchase was $30,738 in October, up $3,500 in one year, according to figures from the Federal Reserve

And the average auto loan in October clocked in at five years and four months, up more than six months from 2002, the Fed found. Nearly 45 percent of auto loans today are for longer than six years.

These longer term loans keeps monthly payments lower, so many consumer choose to buy a more expensive car, or buy a new car more often, or rollover their old loan into a new one, according to “Auto Loans Have the Whiff of Bad Debt About Them” in the Detroit News.

S & P found that delinquencies of 60-days or more on auto loans issued to consumers with highest credit quality are up 20 percent compared to the same period a year ago. S&P this month reviewed its ratings on $113.5 billion in auto-loan securities that it had rated in the last two years. It didn’t issue any downgrades but predicted that losses will rise in 2008.