Sarah T.
When you imagine a bubble, what comes to mind? For most, they think of a beautiful orb rising into the sky, only to burst, disappearing altogether. It’s a lovely thought, and many of us have fond memories of bubbles as children. But what about those real-life bubbles?
In finance, a bubble happens when prices rise fast and way beyond what something is actually worth—then suddenly crash. Think back to the housing bubble in 2008 or the dot-com bubble of the early 2000s. In this blog, we’ll take a look at whether a car loan bubble could be forming, what’s causing concern, and what it might mean for buyers and borrowers.
Current Trends in Auto Lending
Right now, the auto lending world is seeing some big shifts. First off, car prices are still high. Inflation and everyday living costs—like groceries, rent, and gas—have gone up, and that makes it even harder for folks to afford a car. Now there’s also the threat of new tariffs. A 25% tariff on imported vehicles and auto parts could drive prices up even more. Even cars made in the U.S. would likely be more expensive since many parts are shipped in from other countries. According to S&P Global Mobility, a $25,000 car could end up costing $6,250 more with the full tariff.
With prices rising, people are borrowing more than ever. Auto loan debt in the U.S. has reached $1.655 trillion, which is about 9.2% of all consumer debt. The average loan is around $41,572 for a new car and $26,468 for a used one. To keep monthly payments lower, more people are turning to longer loan terms—sometimes stretching over seven years. Subprime lending (loans made to borrowers with lower credit scores) is also on the rise, which can carry more risk for both the lender and the borrower. All of these factors have people wondering if something bigger is brewing.
Signs of a Potential Car Loan Bubble
A car loan bubble happens when too many people borrow more than they can realistically afford, often on overpriced vehicles. Just like a housing bubble, it can burst when borrowers start falling behind on payments in large numbers—leading to a chain reaction that affects lenders, car values, and the broader economy.
Here are some red flags that might signal a car loan bubble:
- People are borrowing more than ever before, even for used vehicles.
- Longer loan terms (72 months or more) are becoming more common just to keep monthly payments manageable.
- Subprime lending is on the rise, meaning more loans are being given to people with lower credit scores.
- Used car values are dropping, leaving some borrowers owing more than their car is worth.
- Tariffs and inflation are driving prices up, but wages aren’t keeping up.
Another big concern is the rising loan-to-value (LTV) ratio, which means borrowers are financing nearly the entire cost of the car—or even more. At the same time, delinquency rates are climbing, with more people falling behind on payments.
“Do I see a bubble of auto loans and then a bursting of the bubble? I would say yes, that delinquencies are going to get worse,” said Pamela Foohey, a law professor at the University of Georgia who specializes in bankruptcy and consumer law.
Joseph Yoon from Edmunds points out another issue: “Consumers are stuck in this situation where the smaller, cheaper vehicles that they could find maybe seven, eight years ago just don’t even exist anymore.” That’s forcing people to borrow more—sometimes more than they should.
Why It May Not Be a Bubble
While there are warning signs, not everyone agrees that we’re in a full-blown car loan bubble. Unlike housing or stock market bubbles, which involve rising values based on speculation, cars are depreciating assets. No one’s buying a car expecting it to increase in value—it starts losing value the moment you drive it off the lot. That makes it a very different situation from past asset bubbles.
Another difference is that lenders are starting to tighten their standards. Banks and other financial institutions are becoming more cautious about who they approve and how much they lend. That can help prevent risky borrowing from spiraling out of control.
Plus, unlike homes, cars don’t play the same long-term role in building wealth. So while people may be borrowing more and struggling with payments, the larger financial system isn’t relying on these loans in the same way. It’s something to watch—but it’s not the same as past bubbles.
Financial Tips
So, what does this mean for consumers? If prices keep rising and loan terms get longer, some borrowers could end up owing more than the car is worth—a situation known as negative equity. This can happen if the car’s value drops faster than the loan is being paid off. If you need to sell or trade in the vehicle, you could still be stuck paying off the remaining balance.
If you’re thinking about financing a car, here are a few tips to keep in mind:
- Know your budget: Figure out what you can truly afford each month—without stretching your income too thin.
- Check your credit: A better credit score could help you lock in a lower interest rate.
- Keep your loan term reasonable: A shorter loan might mean higher monthly payments, but you’ll pay less in interest overall.
- Don’t finance extras: Taxes, fees, and add-ons can drive your loan balance higher than the car’s value.
- Shop around: Compare lenders, not just dealerships.
Auto refinancing can also help if you're already locked into a high-rate loan. It could lower your interest rate or monthly payment—giving you some breathing room without trading in your car or starting over.
The Bottom Line on Car Loan Trends
While rising prices, longer loan terms, and higher debt levels have many experts on alert, it doesn’t automatically mean we’re heading for a full-blown car loan bubble. Still, it's a smart time to pay close attention to your finances. If you're feeling stretched by your current auto loan or worried about future payments, refinancing could be a way to lower your costs.
At RateWorks, we help drivers find better loan terms so they can keep more money in their pocket. Because car ownership shouldn’t come with unnecessary financial pressure. Ready to get started? Get a free quote today.
