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Doubling Down on Debt: Recession, Recovery and the Rise of U.S. Auto Loans

This President’s Day weekend, auto dealers will once again try to lure Americans into showrooms, hoping to attract them with holiday deals and maybe even appeals to their patriotic zeal, such as this ad from Dodge in 2010 (which you just have to watch).

The closing line of the ad – “Here are a couple of things America got right: cars and freedom.” – speaks to the central place cars have held in the American imagination and in public policy. But while car companies might want us to enter dealerships with visions of driving our muscle cars into battle, the reality of car ownership is usually far less exhilarating.

Our new report, Driving Into Debt: The Hidden Costs of Risky Auto Loans to Consumers and Our Communities, deals with the flip side of a car’s promise of freedom – the often inescapable burden of debt.

Currently, Americans owe more for our cars than we ever have before. More of us have auto debt than at any point in history, and we’re taking longer to pay it back. This not only makes millions of American households financially vulnerable – especially in the case of an economic downturn – it also has meant more cars on the road, more driving, more traffic fatalities and more pollution from our tailpipes.

It’s tempting to see this accumulation of debt as either the natural result of America’s so-called “love affair” with the car, or as an involuntary burden forced on Americans by our car-centric transportation system. Both are true to some degree. But it’s easy to forget that one of the most important players in fueling the new round of rising auto debt was our own federal government.

During the Great Recession, in order to stoke economic recovery and consumer spending, the Federal Reserve lowered interest rates to record levels, making it cheaper to borrow. After the bank bailout, Congress also awarded billions of dollars to the hemorrhaging auto industry. The federal government coaxed Americans into showrooms across the country with the 2009 Cash for Clunkers program, a $2.8 billion initiative that offered car buyers a discount of between $2,500 to $4,500 for the purchase of new, fuel-efficient cars in exchange for their gas-guzzling Jeeps and Ford F150s.

But one recipient of the federal government’s efforts and auto bailout package wasn’t a car manufacturer, strictly speaking. While most of the $80 billion allotted for the industry’s rescue went to General Motors and Chrysler, $17.2 billion of the federal relief package was awarded to GMAC, General Motors’ financing arm (now Ally Financial), enabling the company to restore the flow of credit to would-be car buyers. Later, Chrysler’s financing arm would also receive bailout money.

Soon thereafter, the lending companies loosened their lending standards – a move that was soon followed across the auto finance industry. GMAC was the first financial institution to publicly state it would use its bailout money to offer credit to consumers, lowering the minimum credit score to qualify for financing from 700 down to 621 – nonprime levels. GM began pushing zero-percent and low interest financing, particularly on its largest – and most expensive – gas-guzzling truck and SUV models. The larger and more expensive the car, the higher the price tag, and the more debt you take on to buy it.

Auto finance companies, including captive financers like GMAC, lend more to those with low credit scores than traditional finance institutions like banks and credit unions.

The federal government’s efforts to get Americans to buy cars didn’t end there. The federal government also began to back all new car warranties. And the 2009 economic stimulus bill even allowed those spending up to $49,500 on a new car to deduct all sales and excise taxes from their federal income taxes.

All of these efforts to get Americans to buy cars – and help to resuscitate the dying car industry – worked like a charm. New car sales surged, with an unprecedented streak of seven straight years of sales increases. During his 2012 speech at the Democratic National Convention, President Obama spoke with pride about what federal government policies had built. American car manufacturers, he said, couldn’t even “build [cars] fast enough because we reinvented a dying auto industry that’s back on top of the world.”

But that rise in car sales has come with some side effects. Between 2014 and 2016, the number of miles driven by Americans rose 5 percent. That same period also saw the largest two-year increase in traffic deaths in more than half a century. Gasoline consumption increased after five consecutive years of decline. Greenhouse gas emissions from transportation rose, too.

And more Americans than ever are dealing with the financial hangover from the debt they took on to drive auto sales to new heights. Delinquencies rose – and are still rising – as are car repossessions. Millions of Americans carry debt that will constrain their financial freedom for years to come.

If we truly valued freedom – including the freedom to avoid the burden of debt to own a car – could we have responded to the Great Recession in a different way: one that didn’t result in further cementing dependence on cars?

Could we have increased investments in public transit, perhaps, or made more of our communities places where people feel safe to walk and bike to work? Could we have “reinvented” the auto industry such that it didn’t require debt and the financial insecurity of millions of Americans? Could we have started a conversation about what true freedom means – both for transportation and our economy?

It’s not too late for that conversation to begin.

This President’s Day weekend, like many Americans, I’ll be visiting a car dealership, too. Not to buy a vehicle, but to sell one.

Just this week, I moved to Boston, a city with a far more functional transit system and stronger biking culture than any place I’ve ever lived. I’ve come to believe that real freedom means not having to worry where I parked my car on street sweeping day like I did in Denver. As a former Southern Californian, it’s never having to sit in rush hour traffic for the rest of my life. Freedom means not being terrified to ride a bicycle, like I am in my home state of Kansas. And freedom is never having to pay insurance or make those paycheck-draining monthly car payments again, like I have for years, constantly, every place I’ve lived.

More Americans deserve the opportunity to choose their own vision of freedom when it comes to transportation, rather than being forced to go into debt for the car they currently need to live full and productive lives. It’s a freedom that many Americans are hungry for. And it’s one that can only come into being once we change the public policies that have reinforced our dependence on cars for so long.

Photo Credit: Wikimedia User Charvex

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